Over the last two weeks, three reverse mortgage lenders made announcements that they will be coming out with their own “proprietary reverse mortgage products.
These announcements got me thinking, most people who are familiar with the FHA insured Home Equity Conversion Mortgage (HECM), probably have no ide what
a proprietary reverse mortgage is. If you fall into this group, allow me to explain.
Reverse mortgage is a type of mortgage, and while the term is used interchangeably with the HECM, the HECM is just the name of FHA’s reverse mortgage
program. A proprietary reverse mortgage is a reverse mortgage with features and benefits offered by only one specific company.
Another way to think of it is by compare it to refrigerators. Sub-Zero is the top-of-the-line when it comes to refrigerators. They are the only one that
offers certain features and benefits, albeit for a higher price. KitchenAid offers different features and benefits at a lower cost, as does Kenmore,
but they are all refrigerators.
Proprietary reverse mortgages can also be referred to as “Jumbo” reverse mortgages because most of these programs have been geared towards homes with higher
values. This reason for this is that HECM loans all have a limit on the maximum value they are able to use in their calculation. This is called the
“maximum claim amount”, and currently this amount is $679,650. In other words, if someone has a $1.5 million home, the HECM loan will calculate the
amount of the loan as if it was only worth $679,650. Proprietary reverse mortgages, or jumbo reverse mortgages, don’t have this cap on the value. Typically,
they can go up to $3 – $5 million.
However, since lenders that offer these loans don’t have FHA to back them up with the mortgage insurance, their loan amounts are lower compared to the
value than the HECM loan. But by the other side of the coin, they also don’t have the big upfront initial mortgage insurance premium and they are not
limited on the value the way HECM loans are. The IMIP on a HECM loan for a home with a value of $679,650 would be $13,593 (2.0% of the max claim amount).
For example, if a proprietary lender can loan 25% of the value on a jumbo loan for a home worth $1.5 million, that’s $375,000. A HECM loan on the same
property at 40% of $679,650 (FHA max claim amount), is just $271,860 – over $100,000 less than the proprietary program.
One of the lenders coming out with new proprietary programs later this year is Longbridge Financial CEO, Chris Mayer. He made a very good point earlier
this month at the National Reverse Mortgage Lenders Association (NRMLA), eastern conference meeting in New York when he said, “The idea that nearly
our entire industry relies on the federal government for what it does, in addition to all of the state rules. It’s really hard to run a business that’s
so heavily dependent on Washington. It is important to offer non-FHA reverse mortgages so the industry is insulated from policy changes and can serve
a wider variety of customers.”
I remember back in 2006 and into 2007, there was a lot of activity in proprietary reverse mortgages but is was all shelved as the financial and housing
crisis took hold in 2008. It’s exciting to see the activity returning and that we will have more options for people wishing to take advantage of these
reverse mortgage programs.