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Jumbo reverse mortgages originally derived their name from the fact that they were used almost exclusively for high-dollar-value homes. They have also been called proprietary or private reverse mortgage programs at times. However, those programs are becoming much more prevalent and not necessarily just for use with very expensive properties anymore, so the “private reverse mortgage” label is becoming more popular along with the loan itself.
Primary uses have changed as HUD changes.
The private programs were used almost exclusively for properties with higher values than allowed by the U.S. Department of Housing and Urban Development when the programs were first introduced in the mid-2000s. At the time the programs were first introduced, HUD was much more generous on the amount of money the program would allow as a percentage of the home’s value. This meant the property really had to be well above the HUD maximum lending limit for the jumbo or private program to make sense for most borrowers.
Private programs disappeared with the market crash.
After the secondary market for mortgage products began to severely dry up in 2008, the investor appetite for private market reverse mortgages vanished entirely in 2009 leaving only the HUD home equity conversion mortgage (HECM) loan available to borrowers of all property values. As part of the stimulus program (the American Recovery and Reinvestment Act of 2009), the national lending limit for reverse mortgages was raised to $625,500. But considering the actual principal limit (or the amount the borrower received) with a lending limit capped at $625,500 on a property worth $2 million or more, this meant depending on the borrower’s ages, those borrowers may be limited to just $325,000 to $425,000, less than 16% of the value of home. Senior borrowers with existing loans were often unable to pay the shortfall to enable them to utilize the reverse mortgage program.
A new program emerges, but slowly at first.
The market had no private programs for about five years, and then in September of 2014, a new proprietary program was introduced. Borrower acceptance and origination of the product was slow at first. The program was extremely conservative with low loan amounts as compared to value and conservative underwriting guidelines. The HUD program gave borrowers more money all the way up to values of $1.2 million in most cases, even though HUD capped the maximum value at which any additional value resulted in additional funds to the borrower at $625,500.
But still, it was a start. Borrowers with homes valued at $1.5 million and above found new hope in a reverse mortgage product that would give them a higher benefit and a better chance of paying off existing liens. Then approximately 18–24 months later, as additional programs began to emerge, the competition for this product began to push investors to make the programs more aggressive. More investors meant program innovations and new products available. Rates have come down, and new programs and more favorable parameters are now available, as well as more and better choices for borrowers with homes of all values.
HUD tightening allowed for more opportunity.
One of the biggest reasons proprietary or private programs have been able to become more prevalent is because HUD has contracted and restricted its program so much since 2015. The losses HUD saw on its HECM program required it to restrict loan amounts and underwriting guidelines on the program so much over the last five years that it has allowed private programs to be much better equipped to compete with the HUD product.
Private programs started with just one full-draw option at almost 8% fixed-rate loans in 2014, and are now available with many different draw options and rates down to below 5%, depending on the circumstances for fixed rates, and multiple adjustable-rate options with even more draw options. As more and more competition for the loans has entered the market, program parameters have become more flexible, and rates have gotten more competitive. There is no reason to believe they will not become more innovative in the future.
The result is a good one for borrowers.
The bottom line is that the issues that HUD has had with losses have had a positive effect on the innovation of private products coming to the reverse mortgage market. This makes the loans more attractive to investors who buy them for their portfolios, which in turn gives liquidity to the market and makes the product even more competitive. This is good for lenders and for borrowers, not only those who own homes valued above HUD’s lending limit at the time, but also for those who may have a great property that just does not quite meet the HUD cookie-cutter framework.