Reverse Mortgage Alphabet Soup — FHA; HECM; MIP; NRMLA; H.R. 1852


Reverse mortgage are statutory creatures. Reverse mortgages exist because the Congress says that they exist, and so, they are creatures of government standard abbreviations. Just like being at OCS to get your O-1 and then a rack in BOQ for USN-SWOS. For land-lubbering taxpayers, that’s Officer Candidate School for Officer Grade 1 (Ensign) and housing in the Bachelor Officer Quarters at Surface Warfare Officer School in the US Navy.

Go HERE for an exhaustive list of all the terms and features of FHA’s (Federal Housing Administration) products and services.

But this article is about something far more exciting than abbreviations, although without them the short press release below from NRMLA on the FHA H.R. 1852 HECM modernized plan would be nearly incomprehensible.

NRMLA Anticipates Movement on FHA Modernization Bill

NRMLA is hopeful that the FHA modernization bill (H.R. 1852) will start moving in the next couple weeks and be voted on by the full House of Representatives after the July 4th recess.

Sponsored by Financial Services Committee Chairman Barney Frank (D-MA) and Rep. Maxine Waters (D-CA), the bill would 1) Permanently eliminate the HECM loan cap; 2) Permit HECM for home purchase; 3) Allow HECMs on housing cooperatives; and 4) Require HUD to study the impact of reducing mortgage insurance premiums, and exempting borrowers from paying any MIP if all, or all portion, of the loan proceeds are used to purchase long-term care insurance.

In addition, H.R. 1852 would increase lending limits for all FHA programs, especially in high-cost areas like California, New York and Massachusetts by raising FHA’s maximum mortgage limits to 100 percent of an area’s median home price.

Over the past couple weeks, NRMLA has been negotiating with other stakeholder groups to remove a provision that would lower origination fees on HECMs to no more than 2% of the "original principal limit of the mortgage." Stay tuned for further updates.

******** I like to say that we are at the beginning of the beginning for reverse mortgages. As much as reverse mortgages have been around for 40 years in a formal sense (and over 2,500 years in other forms – a short history of the world of reverses is coming soon), reverse mortgages are metaphorically hitting their next threshold in Moore’s Law. Which is a nice way of saying that the market for reverse mortgages is growing at an exponential rate – and will all good growing businesses; it’s ripe for more government regulation.

H.R. 1852 as set out above, starts to address the initial framework of reverse mortgages – a framework that served us well until now. Reading some of the dicta and side notes of the committees behind this legislation reveals that the government did not expect reverse mortgages to be so successful a product so fast. It makes you almost wonder whether there will be a rush to "irrational exuberance" over reverse mortgages? I don’t believe that the market will ever become large enough to impact the overall economy too much, but it will be interesting to watch seniors taking responsibility for their own expenses from their own wealth and not relying on government programs or family members for their living expenses. A reverse mortgage is the ultimate libertarian gesture – I will take care of myself, thank you very much. Should be really popular in New Hampshire.

Looking in the crystal ball I think that you will see MIP (mortgage insurance premium) get rolled into the interest rate of the reverse mortgage loans and all but disappear. Despite NRMLA’s obvious incentives in maintaining high loan origination fee caps, you will see a study and drastic reduction in the overall cost of originating reverse mortgages. I think that price competition, which has essentially destroyed the conventional forward mortgage business, will come into the reverse mortgage market. This price competition will at first cause the early entrants to lost market share and gross revenue and for new entrants to take business. Over time it is my opinion that the reverse mortgage lenders that embrace seniors, understand the good karma of reverse mortgages and only sell to those that truly need reverse mortgages will be rewarded with lasting market share. When banks take reverse mortgages as a product focus, especially Bank of America, we will see a transformation of the marketplace that will further and permanently reduce the costs (and therefore origination revenue) of reverse mortgages across the boars.

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