Happy New Year! Some changes are in store for the HECM and the reverse mortgage industry as the new year begins. First of all, the HECM is destined to get a shiny new FHA loan limit for 2023. We’re also likely to see more turmoil in the economy and real estate and mortgage markets as the Fed continues to wrestle with high inflation.
The year 2022 was a crazy one in the mortgage and real estate markets. One year ago at the end of 2021, it was possible to get a 30-year fixed interest rate in the low 3s or better. Today, at the end of 2022, average 30-year fixed interest rates are in the 6s and beyond. Wow! I’ve spent a lot of years in the mortgage industry and I’ve never seen rates spike as aggressively as they have in the last year.
Rising interest rates have led to turmoil in the reverse mortgage industry. Top 10 lender Reverse Mortgage Funding recently declared bankruptcy after losing the warehouse lines it uses to fund loans. AAG, the #1 retail lender by funding volume for the last 5 years, has downsized it’s workforce significantly and is now being acquired by Finance of America.
Rising rates have also impacted the HECM itself. HECM interest rates have increased over the last year, which has led to decreased principal limits. This means that HECM borrowers today qualify for a smaller portion of their home’s value than when rates were lower.
However, rising rates are not all bad for the HECM. Line of credit growth rates are some of the best they’ve been in many years. If you owe little or nothing on your home and don’t need all the money available from a HECM right now, you should take advantage of the high line of credit growth rates.
So, what is in store for the HECM in 2023? Well, it’s a good bet we’ll see more interest rate and real estate market turmoil as the Fed continues to battle inflation. HUD has also made a few tweaks to the HECM program, including a new FHA loan limit for 2023.
More volatility for the mortgage and real estate markets
Inflation continues to rage at levels not seen since the 1980s. Because of that, the Fed will likely continue to increase interest rates (or at least hold them at a relatively high level) until inflation returns to normal. This will likely increase the unemployment rate and push the economy into recession (assuming it’s not already there).
Interest rates and unemployment have a direct impact on home prices, so it’s a good bet we’ll see significant home price declines in many areas of the country in 2023. The markets that saw the most aggressive home price increases during the pandemic will be hit the hardest.
Real estate veteran John Wake has been reporting on the home price declines in Phoenix. Phoenix led the way in the last housing crash, so it’s probably a good bellwether for what’s in store for other pandemic boom markets like Las Vegas, Austin, Boise, and Florida. In you’re interested, you can find his insights here.
Higher unemployment and falling home prices will likely drive an increase in foreclosures and short sales, which will multiply headaches for mortgage servicers. We may see a significant number of mortgage companies go bankrupt in the coming year.
Increased foreclosures and short sales will increase housing inventory and put further pressure on home prices.
I think lower interest rates are on the horizon, but we won’t seem them until the Fed crashes the economy first. The Fed has made it pretty clear that it’s willing to sacrifice economic growth to get inflation under control.
It’s hard to predict exactly what 2023 has in store, but it’s a good bet there will be plenty of economic turmoil. I think inflation will remain stubbornly high, home prices will fall, unemployment will increase, and the economy will enter a potentially deep recession.
A higher FHA loan limit for 2023
FHA periodically revises the HECM lending limit to reflect current real estate market conditions. Last year the HECM lending limit was $970,800, but this year the FHA loan limit will increase to a massive $1,089,300 for case numbers issued on or after January 1, 2023. This change means that many homeowners with higher home values may qualify for significantly more money from a HECM.
The term “lending limit” is somewhat of a misnomer. The lending limit is not a limit on how much you can borrow from a reverse mortgage over time. If your loan balance hits the lending limit at some point, your loan will not be called due and you will not be asked to start making payments.
The lending limit is simply a cap on the appraised value for purposes of calculating the initial proceeds. If the lending limit cap increases, then it means homeowners with higher value homes will have access to more equity than before.
This change will have no impact on homeowners with home values less than or equal to the old lending limit.
The one downside with the higher FHA loan limit for 2023 is that it also increases the maximum IMIP premium. IMIP is calculated as 2% of the lending limit if your home’s value is equal to or greater than the lending limit. The IMIP equals 2% of the home value if your home is appraised for less than the lending limit. In other words, the IMIP equals 2% of the lending limit or the appraised value, whichever is less.
The lending limit increase means the maximum IMIP premium will rise from $19,416 to $21,786.
We’ve updated our reverse mortgage calculators to reflect the lending limit change.
Due and Payable Notice Changes
In August 2022, HUD made a small (but potentially important) tweak to the timeframe in which a lender is to notify a HECM borrower’s estate that the reverse mortgage is due and payable.
Under the previous policy, the lender was to issue the Due and Payable notice within 30 days of the last borrower’s death. The new policy requires lenders to issue the Due and Payable notice within 30 days of HUD being notified of the borrower’s death.
This is a small tweak on paper, but it gives heirs more time to decide what to do with the property after the last reverse mortgage borrower has passed away.
A HECM is Still a Great Option
If you’ve been considering a HECM, don’t let the higher rates get you down. A reverse mortgage is a great option for many seniors whether rates are higher or lower. If a HECM is workable and makes sense, take advantage of it and enjoy the benefits it offers you. You can always refinance your HECM later when interest rates fall.
Our calculators have been updated for 2023 with the new FHA lending limit. If you’d like to find out how much you can get from a reverse mortgage under the new lending limit, check out our reverse mortgage calculator.