Last week, the Federal Housing Finance Agency raised conforming loan limits for Fannie Mae and Freddie Mac, leaving some to wonder if an increase in HECM loan limits from the Federal Housing Administration will follow.
The FHFA raised loan limits for Fannie and Freddie mortgages nearly 7% from last year to $484,350.
Historically, the FHA calculates any increases in the maximum claim amount for reverse mortgage loans based on 150% of this number – although it should be noted that it has no statutory obligation to do so.
That would mean that the HECM MCA limit could possibly be raised from $679,650 to $726,525 if the FHA opts to increase the limit for the third consecutive year.
HECM limits were stagnant from 2011 to 2016, resting firmly at $625,500. In 2017 they were bumped to $636,150, and in 2018 to $679,650.
Will the agency opt to raise the limit again, and what would this mean for reverse mortgages?
For starters, borrowers with higher value homes will be able to extract greater amounts of their equity with the government-insured HECM.
Dan Hultquist, vice president of education and organizational development at Live Well Financial, said raising the limit to $726,525 could significantly enhance proceeds for many borrowers.
Assuming a 5.25% expected rate, the average 73-year-old borrower with a high-value home could get almost $22,000 more in proceeds, Hultquist said.
While downside is that they will also have to pay more in mortgage insurance premiums, that bill would increase $930 in the same scenario – clearly nothing compared with the gain.
Hultquist said it’s possible that more people could qualify for the loan if limits were raised.
“This will be especially impactful in California, Seattle, Hawaii, and some of the higher-priced areas in New York and Florida, where you’re going to see people with million-dollar homes who want to pay off a massive mortgage,” he said. “Originators in these areas could see an increase, because they can go back to the borrowers who were short to close by $20,000 and now, maybe it works.”
Increasing the limit will also close the gap between the FHA-backed HECM and the proprietary reverses mortgages that have flooded the market as of late, making them more competitive.
“For years, we wanted the proprietary to come down and the HECM to come up so eventually they could meet or crossover, giving people more options, and it’s finally happening,” Hultquist said.
How will this impact FHA’s offering?
FHA officials have said publicly a number of times that the agency fully supports the development of a private reverse mortgage market, but could that hurt the HECM’s bottom line?
“As proprietary products begin to appeal to traditional HECM borrowers, that may not be good for the Mutual Mortgage Insurance Fund,” Hultquist said. “This is because proprietary products service predominantly higher-value homes.”
Hultquist said high-value homes are important for the HECM’s book of business.
“High value homes are lower-risk loans for FHA because the MCA is often limited,” he said. “They also contribute more IMIP (in dollars) to the fund and tend to appreciate at better rates.”
In sum, would an almost $50,000 jump in HECM limits be a boost for a product that has seen volume drop significantly in the past year?
“It’s hard to say,” Hultquist said. “Some of those loans could have been serviced by proprietaries, but HECM principal limit factors are still more attractive, so there’s definitely a pocket of values where it makes more sense.”
“If HUD adopts new, higher HECM lending limits, that not only increases some upfront premiums for FHA, but also incentivizes million-dollar homeowners to get a HECM,” he continued. “Those could be low-risk HECMs that are currently being serviced by proprietary products.”