As the reverse mortgage industry approaches the Department of Housing and Urban Development’s fiscal year-end, participants are anxiously waiting to see if there are any surprises to kick off the new year starting October 1.
Around the same time last year, HUD announced it was raising the annual insurance premium charged to borrowers and reducing the amount of money they can receive from the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM). All of the changes were expected, except for one surprise—the decision to lower the effective interest rate floor from 5.50% to 5.00%.
Even with the principal limit reductions, many borrowers started to receive more money because of the lower floor and low interest rates.
The change was welcomed by most originators and borrowers, but it shocked investors and put significant pressure on the prices they were willing to pay for Ginnie Mae’s HMBS product. Investors feared there could be a refinance rally as a result of the unexpected change, which sent pricing for the assets into a tailspin.
Over time, pricing improved, but it taught investors—who were still relatively new to the industry—that October often brings changes to the HECM program. This year, the industry isn’t expecting any significant changes, but investors are watching closely.
“It is certainly something I am concerned about,” said Jeff Traister, managing director for Cantor Fitzgerald when asked about the changes from last year. “They only change I anticipate with any degree of confidence is some announcement surrounding financial assessment. But considering the surprise dropped on the market last year, nothing would shock me.”
The same sentiment was expressed by other investors when Torrey Larsen, CEO of Security One Lending, recently spent a week in New York meeting with different firms involved in the business.
“[Investors] are concerned about whether FHA drops any bombs,” he said during an interview. It’s nothing new, but the anxiety was heightened after the changes in the floor last year. “Every October they’re holding their breath a bit,” Larsen said.
While a spokesperson from HUD said the agency doesn’t have any changes scheduled, no one had any idea the floor was being lowered last year either.
The other topic on some investors’ minds was the upcoming financial assessment, Larsen said.
“We need to get the financial assessment right, with the industry taking the lead,” he said. Investors are very familiar with underwriting from the “forward” business, but they’re trying to understand how it will work with the HECM. The details are still being developed, but they’re looking for some guidance on what it will look like.
“[Investors] know that it’s coming and the reasons behind it,” he said. “They’re just looking for a bit of clarity.”
Even if there are some unexpected changes announced by HUD in the coming weeks, Traister said he is confident everything will work out in the end. Normalcy prevailed, despite the initial craziness of the changes,.
“It just wasn’t exactly a barrel of laughs getting back to normal,” said Traister.
