2009 Reverse Mortgage Changes

The Housing and Economic Recovery Act and The American Recovery and Reinvestment Act have made the Reverse Mortgage program available to even more seniors across the US

The Home Equity Conversion Mortgage (HECM or “Heck-um”) which is the HUD reverse mortgage, went for many years with just a couple of different options, and a margin that stayed constant. You basically had a choice between a monthly adjustable and a yearly adjustable, both with a Constant Maturity Treasury (CMT) for the index and a single option for the margin.

The secondary market for reverse mortgages was good, there were proprietary products which funded loans on properties valued much higher than those on which HUD could lend. HUD had different lending limits in different parts of the country and the demand was stable. But reverse mortgages have seen a lot of quick changes over the last 12 – 18 months and 2009 does not appear to be an end to this trend.

The secondary market has all but dried up and proprietary products have disappeared. Now the HUD HECM Reverse Mortgage is the only game in town with the possible exception of one or two extremely selective and narrow private products. Margins are rising, sometimes almost monthly as borrowers try to close their loans only to find that the margin they thought they would receive is no longer available. What once was offered at 100 basis points over the CMT (and for brief periods even lower) is now being offered at 300 Basis Points over the LIBOR or 350 – 375 Basis Points over the CMT.

There are also now fixed rate reverse mortgage loans available, but they come with fewer options available as to how the borrowers can access their funds. A fixed rate reverse mortgage borrower must take a single draw, whereas a borrower opting for the adjustable rates can choose to take a lump sum; a payment for a set period of time (term) or for life (tenure); a line of credit which can be accessed at their choice; or a combination of all of the above.

Some changes for 2009 were actually put into motion in 2008 with the Housing and Economic Recovery Act (HERA) which was signed into law on July 30, 2008 by George W. Bush. Among many other things included in the Act, HERA increased the limits for HECM to a nationwide limit of $417,000 from the previous county by county lower limits starting in the low $200’s for some counties and going to $362,790 in all but some of the highest cost counties in Alaska, Hawaii, Virgin Islands etc. where HUD allowed for higher limits.

However, this raised limit has been increased still further until December 31, 2009 by yet another piece of legislation, The American Recovery and Reinvestment Act of 2009 which was signed into law by President Obama on February 17, 2009. For the balance of 2009, the limit for the HECM Reverse Mortgage program limit is $625,500 which has helped many senior borrowers with higher balance homes, especially those whose retirement funds saw huge drops when the stock market plummeted.

Another change which was approve with HERA in 2008 but did not take effect until 2009 is the HECM for purchase program. The program was supposed to have been in effect on January 1, 2009 and there was quite a bit of confusion in its beginning. HUD issued Mortgagee Letter 2008-33 which, when issued, actually stated that HUD would require seniors to put less money down if they could find properties for purchase which appraised for more than the selling price.

HUD indicated that there would be a clarification to this lending methodology but then was silent on the issue until they issued Mortgagee Letter 2009-11 on March 27, 2009 which kept most lenders on the sidelines, unwilling to release the HECM for purchase program until HUD clarified its down payment requirements. Now senior borrowers must bring in their down payments and closing costs based on the lesser of the sales price or the appraised value, not just the appraised value as Mortgagee Letter 2008-33 originally stated.

Another addition yet to come with HERA is Reverse Mortgage for Co-ops. There are a lot of areas anxious to see how this will come out and what the restrictions will be. There are both traditional Co-op units and Manufactured Co-ops hoping to be included in the eligibility.

However, after talking to some lenders on the subject, how quickly or even if a lender decides to offer the HECM for Co-ops in a given market will not only depend on how soon HUD announces that it is available, but also how quickly or even if the particular lender is willing to lend on and service loans on Cooperative Projects in any given area or state. Co-ops may not be available as quickly as HUD announces they are ready to roll out the program if the lenders do not put the work into the legal documents, etc.

A couple of other noteworthy items that will greatly affect HECM’s in 2009 and beyond is the issuance of Mortgagee Letter 2008-24 which eliminated the ability of any non-HUD approved lenders to participate in the origination of the HECM product. Prior to this time, HUD (at least passively) allowed for the participation in an advisory capacity of brokers who were not HUD approved in the HECM program. Those brokers could help in the education, advise in the process and accept only a portion of the origination fee due the lender (they could not charge separately for their services).

To be involved in the origination of reverse mortgages now, mortgage brokers must be HUD-approved. There is also another looming date in 2009 for reverse mortgage borrowers and lenders, and that is September 30, 2009. There is a statutory cap on the number of HECM’s that HUD can insure at any time of 275,000 which has been temporarily exceeded when the cap was reached several years ago.

Congress has suspended the cap through various spending Bills and other measures ever since, but there have been times, some very short, when no HECM loans could be insured until another stop-gap could be passed. If the 275,000 limit is not once again temporarily suspended or if Congress does not vote to permanently eliminate the cap, once again the program could come to a grinding halt.

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