Reverse Mortgage Industry Faces Calls for Reform as Market Evolves
The U.S. Reverse mortgage market is at a crossroads, with growing calls for significant changes to both the Home Equity Conversion Mortgage (HECM) program and the associated mortgage-backed securities (HMBS). These calls come as proprietary reverse mortgages gain market share and concerns mount over the structure of fees and eligibility requirements within the HECM framework.
Dan Hultquist, director of reverse mortgage communications at Movement Mortgage and co-founder of software firm REVERSE plus, recently outlined key areas for improvement in the HECM program. His proposals, submitted to the U.S. Department of Housing and Urban Development (HUD) in response to a request for information, center on restructuring mortgage insurance premiums, adjusting principal limit factors, and streamlining the collateral risk assessment process.
Mortgage Insurance Premium Structure Under Scrutiny
Hultquist argues that the current HECM mortgage insurance premiums are “poorly structured” due to their front-loaded nature. While acknowledging that HECMs aren’t necessarily expensive over the life of the loan, he believes the 2% upfront premium is too high, potentially deterring borrowers. “If you charge nothing, the Federal Housing Administration (FHA) is not going to collect much in the way of fees. But if you charge too much, nobody’s going to buy it,” Hultquist stated. He proposes reducing the upfront premium to 1%, while emphasizing the need to avoid increasing risk to the Mutual Mortgage Insurance Fund.
Principal Limit Factors Need Adjustment
Another key concern is the principal limit factors, which determine the amount borrowers can access. Hultquist contends that these factors are currently too low, preventing many potential clients from qualifying for a HECM. He notes that these factors haven’t been significantly adjusted despite substantial increases in property values over the past decade. “When you consider the Mutual Mortgage Insurance Fund is very stout right now, I think the time is right to reduce the upfront premium, increase it on back end and also increase the principal limit factors,” he said.
Collateral Risk Assessment Creates Barriers
The current collateral risk assessment process, which often requires a second appraisal on approximately 20-25% of HECM loans, is also drawing criticism. Hultquist points out that this requirement can be a significant financial burden for borrowers, particularly those already struggling to afford the initial appraisal and mandatory counseling fees. He questions the logic of relying on a second appraisal when HUD’s own algorithms are used for valuation, suggesting that a desk appraisal could be a more cost-effective and efficient solution. He also highlighted the potential for increased appraisal bias with the current system.
Proprietary Reverse Mortgages Gain Traction
The rise of proprietary reverse mortgages, now accounting for roughly of the reverse mortgage market, is further fueling the debate over HECM reform. Hultquist acknowledges the success of these products, attributing their growth to their ability to circumvent certain HECM guidelines. Proprietary loans are increasingly appealing due to their flexibility, allowing for financing on non-FHA-approved condominiums and offering lower age eligibility requirements.
However, Hultquist emphasizes that the HECM product remains superior over the life of the loan due to its line-of-credit growth and generally lower interest rates. He notes that while proprietary products offer higher loan amounts, approximately half of the demand is now for smaller loans – those under , the current HECM limit – driven by factors such as paying off unsecured debt at closing.
Technology Aims to Improve Loan Origination
Amidst these industry shifts, technology is playing an increasingly important role. REVERSE plus, the software firm co-founded by Hultquist, recently launched new tools designed to help loan originators better explain and model reverse mortgages. Their flagship product, ANALYZER Pro, allows for detailed modeling of loan performance over time, incorporating factors such as draw schedules, voluntary prepayments, and inflation rates. Movement Mortgage is already utilizing the software, reporting higher conversion rates and improved client presentations.
Industry Collaboration and Training are Key
Looking ahead, Hultquist stresses the importance of industry collaboration and improved sales training. He points to the collaborative nature of the reverse mortgage community, where participants often prioritize addressing negative public perception over direct competition. The recently announced Reverse Mastermind Summit aims to foster this collaboration and attract new talent to the industry, which currently faces a shortage of experienced professionals under the age of .
The future of the reverse mortgage market hinges on addressing these challenges and adapting to evolving borrower needs. HUD’s ongoing review of the HECM and HMBS programs, coupled with innovation in the proprietary space and advancements in technology, will shape the landscape for years to come.
