From the Funding Longevity Task Force
The Funding Longevity Task Force at The American College of Financial Services has been at the forefront of financial analysis demonstrating the important role reverse mortgages can play in retirement planning if used properly. As part of its ongoing mission, the Task Force tracks important developments within the reverse mortgage program. New communications from the Housing and Urban Development Department (HUD) emphasize the importance of understanding both the scope and limits of the HECM Line of Credit which can be an important tool in successful retirement outcomes. The Task Force is gratified to learn that National Reverse Mortgage Lender Association (NRMLA) is proactively taking steps to assure that reverse mortgage lenders fully understand the appropriate parameters for the program. The Task Force also supports HUD’s recent initiative to further clarify program requirements particularly in regard to the intersection of HUD regulations and state lending laws.
Statement On Disbursement Limit for HECM
On January 19, 2017, HUD published a final rule in the Federal Register. The Rule’s goal is to strengthen the FHA Home Equity Conversion Mortgage (HECM) program by making changes that reduce the risk to the Mutual Mortgage Insurance fund and increase the stability of the program for seniors accessing home equity via reverse mortgages. The Final Rule, 82 FR 7094 Federal Housing Administration: Strengthening the Home Equity Conversion Mortgage Program can be found here, The Rule has revived attention around possible disbursement limits on HECM loans. A straightforward reading of the regulations indicates that an additional cap exists on disbursements from all HECM loan payment options later in the life of the loan.
The current regulation, 24 CFR 206.19(f), updated by the new regulations to be 24 CFR 2016.19(h) contains slight variations in language, including changing the word ‘payment’ to ‘disbursement.’ However, the regulation generally remains consistent. Quoting the new regulation “For all HECMs, no disbursements shall be made under any of the payment options, notwithstanding anything to the contrary in this section or in § 206.25, in an amount which shall cause the outstanding loan balance after the payment to exceed any maximum mortgage amount in the security instruments or to otherwise exceed the amount secured by a first lien.” This regulation limits the total amount of disbursements for a single HECM loan.
It would appear that the maximum mortgage amount allowed would be limited to 150% of the Maximum Claim Amount. The Maximum Claim Amount is defined as the appraised value of the property or the FHA Lending Limit, whichever is less. The Maximum Mortgage Amount is customarily recorded at 150% of the Maximum Claim Amount. For example, a house at the current HECM FHA Lending Limit would have a Maximum Claim Amount of $636,150. The Maximum Mortgage Amount would thus be 1.5 x $636,150 =$954,225. Lower priced homes would have proportionally lower Maximum Mortgage Amounts.
As such, the cap on disbursements from any HECM option appears to be $954,225. However, the outstanding debt could continue to grow after that last disbursement without any cap. Furthermore, the limit to not “exceed the amount secured by a first lien” appears to put an additional cap of any additional disbursements.
For example, while a Line of Credit (LOC) on a HECM can keep growing, if the LOC surpassed the Maximum Mortgage Amount, the borrower could draw up to the Maximum Mortgage Amount and the theoretical LOC beyond this number would not be accessible. However, it is important to note, that a loan modification might be able to solve the cap issue for some borrowers, depending on state law and a variety of other factors.
A Cap On Disbursements Is The Correct Policy:
Some limited but vocal marketing initiatives have encouraged borrowers to participate in a so-called HECM “Ruthless Strategy.” The Ruthless Strategy involves establishing a HECM LOC and only drawing on it if the LOC surpasses the value of the home. A draw of this nature would trigger the non-recourse feature underwritten by the MMI fund. While research has shown that very few borrowers have ever engaged in this strategy, the Task Force supports a reasonable and unambiguous limit. A disbursement limit on the LOC would stem some of the risk for the taxpayer, the Mutual Mortgage Insurance fund, and the program. Notably, the advantages of integrating housing wealth into a retirement plan are not materially affected by the proposed limits.
Need For HUD Clarifications:
The reverse mortgage industry requires further clarification from HUD on the disbursement limits and how they will be applied by HUD in the future. Additional information from HUD is also required on the impact of disbursement limits, if any, on “tenure payment” options. HUD should also address and clarify what is meant by “the amount secured by a first lien.” While HUD does provide some information on the phrase, it is unclear on how it would apply to a disbursement cap.
Task Force Contact Information:
The seven-member task force is comprised of prominent thought leaders and researchers in the financial planning profession: Shelley Giordano, Chair; Marguerita Cheng, CFP®; Thomas C. B. Davison, MA, PhD, CFP®; Wade D. Pfau, PhD, CFA®; Barry H. Sacks, PhD, JD; John Salter, PhD, CFP®, AIFA®; and Sandra Timmermann, Ed.D. Jamie Hopkins, Co-director of The American College New York Life Center for Retirement Income, is spearheading the collaboration between the Task Force and The College.
For more information or to speak with a Funding Longevity Task Force expert please email Shelley Giordano at firstname.lastname@example.org.