Following HUD's decision to boost the reverse-mortgage market in March by having the FHA insure the product in Texas for the first time and changing the permitted origination fees (see MBSL 3/20/00), last week Fannie Mae gave the market another push by announcing that it would purchase Fannie Mae Home Keeper and FHA-insured home equity conversion mortgages (HECMs) from the state, effective immediately.
Although it has taken many years, it now appears that senior citizens in the state of Texas will finally have access to reverse mortgages. As the volume of loan origination in the reverse market is not that great right now, this development could eventually lead to a pick-up in the rate of that rarest or rare occurrences -reverse-mortgage securitizations.
The Fannie Mae announcement, taken from a Nov. 7 lender letter, came one day after the Department of Housing and Urban Development issued "additional instructions" on HECM loans made on properties in Texas. The FHA and HUD have been trying to perfect the lending guidelines and loan documentation for Texas reverse mortgages for nearly a year.
"You need big loan pools in order to securitize, and it is not very economical to securitize a very small pool," said David Zhai, an analyst at Moody's Investors Service. "But the market needs some time and either legal or regulatory boosts and education to increase the volume. In this way, the issuer will have the chance to bundle the big pool, and go for the securitization."
"It has taken a year to work out all the kinks, but we can announce unequivocally that reverse mortgages are now available to seniors in Texas," added Peter Bell, president of the National Reverse Mortgage Lenders Association.
Texans amended their state constitution in 1997 to allow reverse mortgages for the first time. But to really open the door to reverse mortgage lending, they had to pass a corrective amendment in 1999 that was acceptable to HUD and Fannie Mae.
As of now, 100% of FHA-insured reverse mortgages are bought up by Fannie Mae. The fact that the GSE is now buying the product from originators in Texas means that lenders will be more encouraged to continue to sell the product, which is a good thing for senior citizens. And if primary market production continues, there is a good chance that securitization for the product will pick up as well.
If Fannie Mae was not buying the product, lenders have to generate warehouse lines and hold the mortgages on their books.
Though the handful of reverse mortgage securitizations done thus far did not involve FHA-insured loans, observers say the possibility exists that this product too is likely to be securitized. Moreover, at a time when major players such as GMAC Mortgage Corp. and EDS/Wendover Financial Services exited the industry due to a perceived lack of interest from borrowers, the Fannie Mae and HUD policy changes which took place earlier this year serve to drum up more widespread public acceptance for the product and increase its huge potential as a significant securitization force in years to come.
In March, HUD announced two major changes to its reverse mortgage program that may boost reverse mortgage securitizations over the next two years. Firstly, the Federal Housing Administration will begin insuring reverse mortgages in the state of Texas, the only state that did not allow reverse mortgage originations up until then. Secondly, HUD changed the permitted origination fee for new HUD-insured reverse mortgages - a change that will surely make the loan product more popular among its often cash-poor customers, senior citizens.
The reverse mortgage was designed to give homeowners who are 62 and older a means of converting the equity in their home into cash without having to sell or give up the title to their home. The amount of the loan is based on whether the home is debt-free and the amount of equity in the home.