Liquidity, Insurance Premiums Top Demands In Review Of Hud’s Reverse Mortgage Programs

Facing what they describe as a broad request for information (RFI) on potential changes to federal reverse mortgage programs, industry experts are focusing on two pressing issues: mortgage insurance and liquidity constraints.

In October, the U.S. Department of Housing and Urban Development (HUD), along with the Federal Housing Administration (FHA) and Ginnie Mae, issued an RFI seeking public comments on possible improvements to the Home Equity Conversion Mortgage (HECM) and HECM Mortgage-Backed Securities (HMBS) programs.

Industry participants view the RFI as a rare opportunity to rewrite the playbook. Its depth and scope signal a desire for a comprehensive reassessment of the programs — and how they compare to the proprietary reverse mortgage market.  

“It’s a good indication that HUD and Ginnie Mae are paying very close attention to these critically important programs, given the aging population of our country,” said Steve Irwin, president of the National Reverse Mortgage Lenders Association (NMRLA). “They may not only create more efficiencies but also reduce any regulatory burden that might be associated with these programs.”

Caroline Jensen, counsel in the Chicago office of Mayer Brown, said industry responses are likely to fall into two categories. 

“One would be the ground-level fixes for those who are working day to day with HECM loans and HMBS have always wanted: improving the claims process, fixing loan-level or eligibility issues that create operational headaches,” Jensen said.

“The second category is the macro-level fixes that the industry has grappled with — and the biggest concern remains HMBS buyout obligations and the liquidity pressures it places on issuers.”

Sources of liquidity pressures

Under current rules, Ginnie Mae requires lenders to buy a HECM loan out of an HMBS pool once its outstanding principal balance reaches 98% of the maximum claim amount.

While the requirement protects investors and supports program stability, industry participants describe it as “clunky” and a major source of liquidity strain. After a buyout, an issuer must assign the loan to FHA for claim payment. But documentation issues, property condition problems or other defects can delay that assignment, tying up capital for long periods.

The Biden administration tried to fix the issue by launching “HMBS 2.0,” which released a final term sheet in November 2024. That was the last major policy initiative under Sam Valverde, Ginnie Mae’s former acting president. It would have reduced the HMBS pool size to 95% of the loan’s unpaid principal balance while allowing various property valuation methodologies, factoring these into the pool at 90% of valuation.

“That was one potential approach to create a new type of HMBS and give these loans a securitization option that’s not presently available,” Jensen said. “For this new RFI, the industry will likely look back at the existing HMBS program and ask: What changes do we want to see?”

Tim Wilkinson, vice president of capital markets at Longbridge Financial, said several industry proposals retain the 98% threshold but rethink what happens afterward.

“There are elements of the HMBS 2.0 program that would allow the loans to be serviced beyond that point,” Wilkinson said. “Some proposals suggest that FHA still owns the loans, but the private sector is responsible for servicing and the management of those loans through resolution.”

Irwin said there’s also an opportunity to create a mechanism to pool HECM loans after they reach the 98% buyout trigger — a move that could ease liquidity pressures on lenders, reduce the volume of assignments to HUD and limit the government’s long-term servicing burden.

“While the RFI is expansive, and its scope and breadth are huge, one of the critical points that the industry will be making is the opportunity for Ginnie Mae modernization and the opportunity to create an additional program for those 98% buyouts,” Irwin said.

He added that the industry is not asking to change the existing requirements but to establish an additional post-98% process — something “fairly simple” that would not require legislative or regulatory action.

Unaffordable insurance premiums

Mortgage insurance is what makes the HECM program possible and allows the loans to remain non-recourse. But the current upfront premium — 2% of a home’s value — is widely viewed as excessive. Many proprietary reverse mortgage products are trying to address this pain point.

“It can be relatively expensive, particularly for low-drawn loans or in the higher rate environment we’re going through. That upfront cost, relative to the proceeds of the borrower, is significant,” Wilkinson said.

Wilkinson explained that before HUD’s 2017 changes, the program used a bifurcated structure with a lower mortgage insurance premium (MIP) rate for low-utilization loans and a higher rate for high-utilization loans. These reflect the different levels of risk they pose to the Mutual Mortgage Insurance (MMI) Fund.

“The industry has put forward some proposals about a better framework to scale that MIP to better represent the risk that the new loan may represent to the MIP, ultimately opening the program up to have relatively lower costs for people who weren’t necessarily drawing,” Wilkinson said.

Irwin also supports a “risk-based pricing approach to the initial MIP” that’s tied to the amount drawn. Without offering details, he said HUD previously had a more risk-based approach, and NRMLA expects to propose returning to a version of that.

“If you pay MIP as you go, rather than this outsized initial charge, that is where our thinking is going,” he added.

According to Irwin, the challenge is that the current interest rate environment is making the product unattractive for some borrowers.

“On the forward side, a higher rate means higher monthly principal and interest payments, while on the reverse mortgage side, it means lower available proceeds to new borrowers,” Irwin said. “They aren’t able to qualify often because the portion of the lower proceeds is being consumed by this flat initial MIP.”

The 2% upfront premium, he added, is particularly discouraging to low-dollar or discretionary borrowers — those seeking a standby line of credit for unexpected medical bills, home repairs or volatility in their retirement portfolios.

A positive outcome

HUD is accepting comments on the RFI through Dec. 1.

Wilkinson — who called the HECM program “an elegant means for seniors to access home equity since the late ’80s” — said an ideal outcome would be reduced bureaucracy and more streamlined, efficient processes.

As for Ginnie Mae, Jensen highlighted the agency’s core mission: “What are the goals of that agency? It’s to ensure that your issuers have enough liquidity and are solvent and can continue to service their portfolio.

“Anything that creates a more liquid market, anything that shores up the solvency of the participants and makes operations easier for them, I think that would be a good result,” she added. “So we’ll see how they respond.”