MBA lays out proposed changes for federal reverse mortgage programs

The Mortgage Bankers Association (MBA)’s proposals to reform federal reverse mortgage programs include seven key recommendations — ranging from the creation of a new securitization option to charging insurance premiums based on the actual amount drawn. 

In October, the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) and Ginnie Mae issued a request for information (RFI) that seeks public feedback on potential changes to the Home Equity Conversion Mortgage (HECM) and HECM Mortgage-Backed Securities (HMBS) programs.

Industry experts have zeroed in on two pressing issues: mortgage insurance and liquidity constraints, which the MBA letter addresses.

“The demand for HECM loans remains strong among seniors. However, overall HECM loan volume has not increased due to overly burdensome aspects of the loan process and the steep upfront costs associated with the loan. These factors discourage many potential borrowers as they evaluate whether a HECM is suitable for their needs,” the MBA stated in a letter dated Nov. 26.

The letter was signed by Pete Mills, the MBA’s senior vice president of residential policy and strategic industry engagement. It was addressed to Frank Cassidy, the FHA’s principal deputy assistant secretary for housing, and Joseph Gormley, Ginnie Mae’s chief operating officer.

Liquidity proposals

Under current rules, Ginnie Mae requires lenders to buy a HECM loan out of an HMBS pool once its outstanding principal balance reaches 98% of the maximum claim amount (MCA).

The MBA is advocating for a new HMBS security that would allow all HECMs at 98% of the MCA to be resecuritized. The association argues that this change would stimulate investor demand and increase guaranty fee revenue.

Separately, the trade group proposes a program to allow private servicers to continue servicing loans after assignment to the FHA — once the 98% MCA threshold is met. This would relieve FHA of servicing losses and operational burdens. Seniors would also avoid the confusion and complexity of servicing transfers. 

“Private servicers would retain servicing fee revenue throughout the life of the loan, strengthening their business models,” the MBA stated. “The competitive nature of the market could encourage entities to pass some or all of the benefits on to borrowers in the form of more advantageous loan pricing.”

Mortgage insurance and more

The MBA also addressed concerns about the HECM mortgage insurance premium (MIP) structure.

The current upfront MIP — 2% of a home’s value — is widely considered excessive. The association proposes basing the upfront MIP on the amount actually drawn rather than the home’s value or the MCA, which the trade group claims would better serve lower-risk homeowners.

To offset changes to the Mutual Mortgage Insurance (MMI) Fund, the MBA supports a targeted increase to the ongoing MIP, which is currently 0.5% of the outstanding balance. It also recommends a higher upfront MIP for borrowers refinancing from one HECM to another to discourage unnecessary churn.

The MBA urged FHA to increase principal limit factors, noting that low levels of accessible equity discourages some borrowers. It also “strongly opposes” a mandatory Life Expectancy Set-Aside (LESA) requirement for all borrowers, arguing that it should apply only to those at high risk of default.

The trade group calls for modernization of the collateral risk assessment process, including greater use of automated valuation models (AVMs) to reduce costs and delays. And it encourages the broader use of digital tools and expanded remote access to counseling services.

The MBA envisions a market in which both HECM and proprietary reverse mortgage products serve “distinct but necessary roles.” But it agrees that the HECM program needs modernization, so it’s proposing changes that it believes “will help lower costs for consumers, increase adoption, and enhance long-term sustainability.”

HUD is accepting comments on the RFI through Dec. 1.