NRMLA speaks out on the future of federal reverse mortgage programs

After federal housing leaders issued a request for information in October about the future of two key reverse mortgage programs, the National Reverse Mortgage Lenders Association (NRMLA) weighed in last week with a detailed list of suggestions.

The trade group issued an 11-page letter to the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) in which it touched upon multiple aspects of the Home Equity Conversion Mortgage (HECM) and HECM Mortgage-Backed Securities (HMBS) programs.

NRMLA isn’t the only industry stakeholder to provide feedback to government officials.

Late last month, the Mortgage Bankers Association (MBA) offered seven recommendations to reform the programs. Its letter focused on better liquidity options through Ginnie Mae to support the resecuritization of high-balance loans, along with a scaling back of the upfront mortgage insurance program that’s been criticized for suppressing borrower demand.

The MBA also spoke out in favor of alternatives to the second appraisal requirement for some HECM loans. It seeks increased use of automated valuation models (AVMs) and other ways of cutting costs and processing times. Meanwhile, the Appraisal Institute told government officials that it supports the second appraisal rule because it “provides an essential check against overvaluation risk.”

What does NRMLA want?

In an interview with HousingWire’s Reverse Mortgage Daily, NRMLA President Steve Irwin said his organization “firmly believes that the FHA-insured HECM program is a critical foundation from which new products can be developed, and other cool and exciting innovation can happen.”

But the HECM and HMBS programs, which have been mainstays of the industry for decades, will need to evolve to keep pace with the multitude of proprietary reverse mortgages now on the market, he added.

In its letter to federal housing officials, NRMLA stressed that proprietary products will not fulfill the needs of many borrowers. Private-label products with adjustable rates are available in roughly 27 states and fixed-rate products in 34 states, while a handful of states like Maryland and Tennessee prohibit all proprietary reverse mortgages.

Possibly the biggest disadvantage of the HECM in relation to a private-label loan is the upfront mortgage insurance premium (MIP), which is 2% of the home’s value. NRMLA said this cost is especially detrimental to borrowers who are withdrawing a smaller percentage of their home equity, and it estimates that about 25% of potential HECM originations have been lost since risk-based pricing was eliminated by the FHA in late 2017.

“What we see is, given the current macroeconomic conditions, some people are not able to qualify because of high upfront costs associated with that initial mortgage insurance premium,” Irwin said.

The trade group is advocating for a return to the former structure in which borrowers who initially withdraw 60% or less of the principal limit factor would pay an upfront fee of 0.5% of the home’s value. It also suggests that the annual MIP for these borrowers could be increased from its current figure of 0.5% to cover any actuarial losses to the FHA’s Mutual Mortgage Insurance Fund.

“Borrowers are more sensitive to up-front costs than ongoing rates since they do not make mortgage payments,” NRMLA explained in its letter. “… This proposal would also improve the fairness of the program; homeowners that borrow more, and pose a higher level of risk, will pay more into the MMI fund.”

Ideas for HMBS reform

The trade group also referenced some key changes it would like to see for the HMBS program. Among these is a shift away from the Constant Maturity Treasury (CMT) to the Secure Overnight Financing Rate (SOFR) that’s been an investor benchmark for a few years. This would “improve the efficiency and pricing of the HMBS market,” NRMLA argued.

As it currently stands, floating-rate securities issued by Ginnie Mae are based on a SOFR index that resets each month. But HECM loans that underpin the securities are indexed to the one-year CMT, creating a “mismatch” that leads to less favorable pricing and reduced investor demand.

“We don’t want HMBS to be an outlier, nor a niche product, when it comes to the utilization of the indices used,” Irwin explained. “And as investors get more comfortable modeling the SOFR indices, we don’t think we should be operating with a disconnect and a reliance on the CMT indices.”

Irwin also touched on the idea for a new HMBS security that’s gaining support throughout the industry. This would “directly address significant liquidity and operational risks currently faced by issuers and, indirectly, Ginnie Mae and FHA.”

The new offering would contain HECM loans that must be repurchased from their HMBS pools after reaching 98% of their maximum claim amount (MCA). Critically, NRMLA said the new offering would not require lenders to buy out the resecuritized loans at 98% of their MCA, nor would it require a buyout of any related tail issuance.

The trade group referenced the late 2022 bankruptcy of Reverse Mortgage Funding as “stark evidence of the risks inherent in the current HMBS structure,” writing that the company was unable to finance the mandatory repurchase of these high-balance loans due to higher interest rates and declining investor demand.