A number of recent articles stated that the government’s new reverse mortgage changes (Mortgagee Letter 2017-12) will make the program less attractive to borrowers. However, this might have been an initial overreaction. While the program is being adjusted, the changes to the program could improve the market, lower costs for some borrowers, and secure the long-term health of the program.
Let’s take a quick look at how the program will be changing;
Changes in Upfront Mortgage Insurance Premiums: In the past, a borrower would be charged an upfront Mortgage Insurance Premium (MIP) amount based on the amount being withdrawn from their home equity. For instance, if a borrower took 60 percent or less of the loan proceeds upfront, the upfront MIP rate was 0.5 percent of the “maximum claim amount” (typically the appraised home value at time of loan).
Market Impact of Changes in Upfront Mortgage Insurance Premiums: Since one disincentive to take a large lump sum amount disappears with the new MIP change, the market could see a slight increase in the amounts of initial withdrawals. However, borrower behavior is not expected to change dramatically as a result, because the industry and professionals alike have been trending away from large lump sum distributions for years now.
Lower Ongoing Borrower Costs: Coupled with the increased upfront change to the MIP rate, ongoing MIP rates will also change. Historically, the annual MIP was 1.25 percent of the outstanding loan balance. This is now being reduced to 0.5 percent of the outstanding loan balance, which could translate into thousands of dollars of savings each year for a borrower. For instance, a borrower with a $300,000 loan balance would save roughly $1,000 a year in MIP payments under the new system.
Market Impact of Changes in Principal Limit Factors: The lowered rate floor will most likely result in a more competitive reverse mortgage market. It will encourage lenders to offer lower lender margins in order to maximize principal limits for borrowers. Ultimately, this could bring down the cost for the borrower. This reduction in rates and lower principal limit factors will also slow the line of credit growth and debt amount.