Oct. 2017 HUD to Lower Limits and Increase Costs

2017 HECM Changes

In a move that shocked the entire reverse mortgage industry, HUD released Mortgagee Letter ML 2017-12, which will have a huge impact on the reverse mortgage program. The Mortgagee Letter indicates that in order for FHA to continue to endorse the HECM loan program, changes were needed which would increase the upfront Mortgage Insurance Premium (MIP) for many, lower the annual MIP for all as well as reduce the amount borrowers will be able to receive under the program for all new Case Numbers assigned on or after October 2, 2017.The first change noted is to the initial MIP and the Annual MIP. For some borrowers, this change will be a big savings while for others, it will increase upfront closing costs. Borrowers who utilized more than 60% of their initial proceeds due to paying off existing mortgages or using a reverse mortgage to purchase a home prior to the change had to pay an initial premium of 2.5% of the maximum claim amount, which is the lesser of the property value, HUD lending limit (currently at $636,150) or purchase price (if applicable). The new upfront premium of 2.0% will represent a 0.50% savings to those borrowers. However, borrowers who utilized less than 60% of their initial proceeds prior to the change will see their initial upfront MIP increase from 0.50% to 2.0%. Borrowers who planned on setting up a line of credit or monthly payment will now see a higher upfront cost. The annual MIP will drop to 0.50% of the outstanding balance compared to the current 1.25%.

The second change that will have the largest impact on the HECM reverse mortgage program is a reduction to the amount of cash that borrowers will have access to. This was done by way of two changes. The biggest change was that HUD lowered the 5.0% floor to 3.0%, so any loan above 3.0% will now see a reduction in the amount of proceeds available with each rate increase. Additionally, HUD lowered the Principal Limit Factors for most borrowers, even at the floor.

Bottom line is that borrowers who plan on taking more than 60% of available proceeds will see a reduction in closing costs, but they will also see a reduction in available proceeds. Those taking less than 60% will see their initial upfront costs increase. All borrowers will see their annual MIP drop by 0.75% of the outstanding balance per year.

For those borrowers who wish to achieve the maximum available to them should consider starting their reverse mortgage right way. We always see a rush of applications prior to a major change like this one. As such, counseling agencies may become inundated with calls, so plan ahead and call today. In California, we have a 7 day cooling off period in which the lender cannot order a case number for 7 days after counseling has been completed (the 7 day period doesn’t include the day of counseling, so it is technically 8 days).

Beat the HECM changes. You can protect your current limit by getting a case number assigned prior to October 2nd. In order to obtain a case assignment, we need a fully signed application and counseling certificate returned to our office no later that September 29th.

The chart below shows a comparison of the old Principal Limit Factors (PLFs), the new PLFs, the percentage change in the PLF from the old to the new as well as an example of Principal Limit (PL) assuming a home value of $300,000 and interest rate of 5%. If you wish to manually calculate the difference in your own scenario, find your age, then use the % change and multiply it by your home value. That will represent how much less is available to you under the new program.

AgeOld PLFNew PLF% ChangeOld PLNEW PLReduction in PL
620.5240.41011.40%$157,200$123,000($34,200)
630.5300.41611.40%$159,000$124,800($34,200)
640.5360.42311.30%$160,800$126,900($33,900)
650.5420.43011.20%$162,600$129,000($33,600)
660.5490.43811.10%$164,700$131,400($33,300)
670.5560.44511.10%$166,800$133,500($33,300)
680.5620.45310.90%$168,600$135,900($32,700)
690.5690.46110.80%$170,700$138,300($32,400)
700.5760.46511.10%$172,800$139,500($33,300)
710.5830.46511.80%$174,900$139,500($35,400)
720.5910.46712.40%$177,300$140,100($37,200)
730.5990.47512.40%$179,700$142,500($37,200)
740.6060.48312.30%$181,800$144,900($36,900)
750.6140.49212.20%$184,200$147,600($36,600)
760.6220.49812.40%$186,600$149,400($37,200)
770.6310.50812.30%$189,300$152,400($36,900)
780.6400.51812.20%$192,000$155,400($36,600)
790.6480.52312.50%$194,400$156,900($37,500)
800.6570.53412.30%$197,100$160,200($36,900)
810.6650.54512.00%$199,500$163,500($36,000)
820.6740.55611.80%$202,200$166,800($35,400)
830.6820.56711.50%$204,600$170,100($34,500)
840.6900.57911.10%$207,000$173,700($33,300)
850.6990.59110.80%$209,700$177,300($32,400)
860.7090.60310.60%$212,700$180,900($31,800)
870.7190.61610.30%$215,700$184,800($30,900)
880.7290.62610.30%$218,700$187,800($30,900)
890.7390.6409.90%$221,700$192,000($29,700)
900.7500.6539.70%$225,000$195,900($29,100)
910.7500.6678.30%$225,000$200,100($24,900)
920.7500.6826.80%$225,000$204,600($20,400)
930.7500.6975.30%$225,000$209,100($15,900)
940.7500.7123.80%$225,000$213,600($11,400)
950.7500.7272.30%$225,000$218,100($6,900)
960.7500.7341.60%$225,000$220,200($4,800)
970.7500.7401.00%$225,000$222,000($3,000)
980.7500.7401.00%$225,000$222,000($3,000)
990.7500.7401.00%$225,000$222,000($3,000)