WIth new reverse mortgage products being released on Monday − the HECM Saver and HECM Standard − a sense of optimism has been pumped into lenders outlook on the future of the industry.
“This presents enormous opportunity for the reverse mortgage industry,” said the National Reverse Mortgage Lenders Association in an alert to members late last week. The new products provide an environment that could encourage growth but in order for it to remain, “the reverse mortgage industry must act responsibly,” the association said.
By lowering the principal limit floor, HUD has made it possible for younger borrowers to take advantage of record low interest rates and potentially obtain more money from their loan. However, there is also concern about borrowers being persuaded to refinance into the new programs even if it doesn’t provide much benefit. “Such churning could have adverse impacts not only on individual borrowers, but also on the overall perception of the industry and the HECM program,” said the alert from NRMLA.
Both the Department of Housing and Urban Development and investors who purchase securities backed by the loans have expressed concern about the potential for churning. By issuing an advisory alert that outlines parameters for determining whether or not any particular refinancing transaction might be appropriate, NRMLA is looking to get out in front of the issue.
“We have seen aggressive solicitation for HECM-to-HECM refinance transactions on a few previous occasions,” said Peter Bell, President of NRMLA in an email to RMD. “NRMLA’s executive leadership and Ethics Committee wanted to draw a line in the sand to help industry participants determine when refinancing transactions might or might not be appropriate,” he said.
According to the ethics advisory opinion, lenders must illustrate and show comparisons for all products that the lender is offering at the time and the new loan must exceed the funds available under the old HECM. Additionally, it establishes a six month seasoning requirement and other guidelines that ensure lenders demonstrate a bona fide advantage to the borrower. Not only does this provide safeguards for borrowers, but it also protects investors who have helped bring down the costs of reverse mortgages.
“Early prepayments generated from churning loans diminishes investor appetite for reverse mortgage-backed assets,” said Bell.
If there was a drastic increase in prepayment speeds, pricing for the assets in the secondary market would likely be impacted. However, Michael McCully, partner at New View Advisors doesn’t expect any “prepayment wave” from the changes.
“The increase in proceeds available for borrowers will be offset by the higher monthly mortgage insurance premium and traditional borrower inertia,” said McCully. The HECM prepayment rates would almost have to double to reach their historical norm according to the company. “We think HMBS investors are still well protected from prepayments,” he said.
