The Home Equity Conversion Mortgage (HECM) program has long been perceived as a last resort loan option for retirees despite being the best loan for their situation. We can attract a more affluent clientele and reshape public opinion by reintroducing the HECM Saver program.
The HECM Saver program, first introduced in 2010, but later discontinued, offered borrowers a reduced upfront cost option compared to the standard HECM loan. In exchange for the lower UFMIP, FHA lowered the principal limit factor to reduce their risk. Reviving this program will remove the price objection that many borrowers have today and increase the popularity of the program.
This article explores how specifically bringing back the HECM Saver program could transform the perception of reverse mortgages and make the age of 62 a long-awaited milestone for becoming eligible for a beneficial reverse mortgage.
Attracting affluent borrowers
One of the main deterrents for affluent borrowers considering a reverse mortgage is the upfront cost associated with the loan. Lowering UFMIP makes the HECM program more appealing to those whose only objection is the high initial cost.
Currently, a borrower with a $50,000 mortgage balance on their home with a value of $750,000, would result in a UFMIP fee of $15,000, almost one-third of their current outstanding mortgage.
Re-introduce the HECM Saver, and this same borrower would pay $75 in UFMIP, making this a much more attractive option for this consumer. The reverse mortgage will have a low-cost option for those who qualify.
Introducing a low UFMIP option will give choices to consumers, and appeal to a much broader audience. The HECM becomes much more than a loan of last resort and instead becomes a strategic tool to be incorporated into every qualifying senior’s retirement plan.
Financial advisors’ recommendations
Financial advisors play a crucial role in guiding their clients’ financial decisions. Currently, many advisors are not recommending reverse mortgages to their clients simply because it is an unfamiliar product for them.
Most people who work with financial advisors are in a favorable financial position, and when they learn about the HECM program their main objection is the excessively large UFMIP. We have the opportunity to change the cycle from one of decline to one of growth.
Financial advisors will have more and more clients entering into reverse mortgages and will need to become educated on the program. The HECM Saver program aligns with the financial goals of affluent borrowers, and financial advisors will be endorsing the program.
And why wouldn’t they, especially with all the benefits available? Tax benefits, Increased liquidity, growing lifetime line of credit, protection for spouses and heirs, etc.
Shifting public perception
The media often portrays reverse mortgages as loans of last resort. The HECM does attract people in difficult financial situations because those people don’t have other options and they are most likely not to be as concerned with the high UFMIP. The media sees who is attracted to the HECM program and jumps to the conclusion that the program is meant for people in difficult financial situations. The HECM program is meant for all senior homeowners and is a great tool.
By reintroducing this great program and educating financial advisors more people will learn and recommend the reverse mortgage program. With more people obtaining the reverse mortgage out of opportunity instead of necessity, we will reshape the opinion of the product and its many benefits.
This change will take a few years and will lead to a massive increase in acceptance of the reverse mortgage product. At the peak of the HECM market, from about 2007-2009, FHA was endorsing around 110,000 HECMs annually, about twice the volume we saw in 2022. Yet, the population of seniors has increased by approximately 50% in that same timeframe. It is true that there were several factors that contributed to this decline.
The truth is still that we have a life-changing product greatly underutilized simply because of its perception. The industry volume should be closer to 200,000 units annually, and this can be achieved with the reintroduction of the HECM Saver.
Increasing popularity and accessibility
Getting wealthy people to use the program, educating financial advisors, and changing public perception is a great long-term strategy that the HECM Saver program plays well into. However, there is an immediate result in reintroducing the HECM saver and that is the options provided to the current senior population searching for the program but turned off explicitly because of that upfront cost.
More choices equal more consumers. This would be available for those with the extra equity to qualify with a reduced principal limit factor, and this may be the one thing that can tip the scales for many homeowners wanting the program.
The reintroduction of the HECM Saver program has the potential to significantly increase the popularity of reverse mortgages among a wider audience. With lower UFMIP, more homeowners will be encouraged to explore the benefits of utilizing their home equity. This increased accessibility will enable borrowers to leverage their housing wealth more effectively, contributing to improved retirement planning and financial stability.
The math for FHA
FHA risk is reduced with lower Principal Limit Factors. In order for FHA to consider a lower UFMIP option the FHA would have to reduce their risk and exposure.
Currently:
● 62-year-old
● Expected Rate of 6.18% ● PL Factor 0.351
● $700,000 home value ● PL = $245,700
● UFMIP $14,000
Proposed HECM Saver:
● 62-year-old
● Expected Rate of 6.18% ● PL Factor 0.316
● $700,000 home value ● PL = $221,200
● UFMIP $70
This change has a profound long-term risk reduction to FHA, resulting in a loan balance of about 10% lower after 20 years and justifies a lower UFMIP fee.
Over a 20-year time frame, a reduction of just 3.5% of the principal limit upfront saves FHA $92,000 of risk, or about 10% of the loan amount.
This column does not necessarily reflect the opinion of Reverse Mortgage Daily and its owners.
To contact one of the co-authors of this story: Adam Ennabe at [email protected]
To contact the editor responsible for this story: Chris Clow at [email protected]
