The Department of Housing and Urban Development this week revealed some significant changes to its Home Equity Conversion Mortgage (HECM) Program.
The HUD is implementing the following changes: adding the new HECM Saver option to the existing HECM Standard, setting new principal limit factors (PLFs) under both programs, decreasing the effective interest rate floor to 5% from 5.5%, and bringing up the annual mortgage insurance premium fee to 1.25% from 0.50%.
According to Bank of America Merrill Lynch analysts in a report released today, the lower rates and altered PLF tables will create a cashout refinance incentive for some of the borrowers who have HECMs that were originated from October 1, 2009 to Oct. 3.
Considering the premium at which HECM passthroughs now trade, analysts said that breaking down the incentive is important to find out the potential prepay effects of the changes.
To be sure, the analysts measured the refinancing incentive by the potential cashout as a percentage of the former HECM origination balance. More noteworthy is that analysts believe that this is the more appropriate way to look at the problem, instead of outright dollars of incentive.
While it is hard to gauge a given borrower's response to a dollar-based refinancing incentive, analysts said that comparing this incentive to the size of the HECM (i.e. cash) the borrower took out just several months before offers a better result.
Refinancing incentives, according to analysts, are clearly most pronounced for younger borrowers and are usually non-existent or really below 0% for those who are very old.
The highest refinancing incentive under the assumptions analysts made is around 11% of the balance of the original HECM.
Cashout incentive dips as time between the original HECM and the refinancing increases and as interest accrues on the original HECM, they said.
In the ranges considered, refinancing incentives are sensitive to HPA since a new appraisal is needed to refinance, and the borrower will benefit or suffer in terms of the cashout dollars from increased or decreased home equity depending.
The most notable take-away from this analysis, BofA Merrill researchers pointed out, is that since refinancing incentives seem to be limited to a range around 10% of the recent HECM amount in the very best scenarios, analysts broadly expect a low refinacing impetus.
Further considerations include the fact that new HECMs are more costly on a running basis because of the higher MIP rates, analysts said.
Additionally, originator considerations when it comes to the increased new volume resulting from the higher PLFs and regarding responsible lending to the senior community, such as the potential cost-benefit tests, are probably going to lessen the amount of refinancing on the margin, analysts said.
"We do think cashout refinance risks are low, but they are not non-existent," analysts wrote. "In particular, the most at-risk segments are young borrowers, in regions with strong recent HPA growth (e.g. California), and with low loan ages."