Caroline Jensen, counsel in the Chicago office Mayer BrownIndustry responses are likely to fall into two categories.
“One could be the basic solution for those who work with HECM loans every day and have always wanted HMBS: improving the claims process, resolving loan level or eligibility issues that cause operational headaches,” Jensen said.
“The second category is the macro-level solutions that the industry has struggled with – and the biggest concern remains HMBS’s buyback obligations and the liquidity pressure they place on issuers.”
Sources of liquidity pressure
Under current rules, Ginnie Mae requires lenders to purchase a HECM loan from an HMBS pool once the outstanding principal balance reaches 98% of the maximum claim amount.
While the requirement protects investors and supports the stability of the program, industry participants describe it as “clunky” and a major source of liquidity pressure. After a buyout, an issuer must transfer the loan to FHA for payment of the claim. But documentation issues, property condition issues, or other defects can delay the transfer, tying up capital for extended periods of time.
The Biden administration tried to solve the problem 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 size of the HMBS pool to 95% of the unpaid principal balance of the loan, while allowing different property valuation methodologies to be included in the pool at 90% of valuation.
“That was a possible approach to create a new type of HMBS and give these loans a securitization option that is not currently 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 financialsaid several industry proposals would keep the 98% threshold but reconsider what happens next.
“There are elements of the HMBS 2.0 program that allow the loans to be repaid after that point,” Wilkinson said. “Some proposals suggest that FHA would still own the loans, but the private sector would be responsible for servicing and managing those loans through settlement.”
Irwin said there is also an opportunity to create a mechanism to bundle HECM loans after they reach the 98% buyout trigger – a move that could ease liquidity pressure on lenders, reduce the volume of allocations to HUD and limit the government’s servicing burden in the long term.
“While the RFI is expansive and its scope and breadth are enormous, one of the critical points the industry will make is the opportunity for modernization of Ginnie Mae and the ability to create an additional program for those 98% buyouts,” Irwin said.
He added that the industry is not asking to change 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 makes the HECM program possible and keeps the loans non-recourse. But the current upfront premium – 2% of a home’s value – is widely considered excessive. Many proprietary reverse mortgage products attempt to address this pain point.
“It can be relatively expensive, especially when it comes to low-borrow loans or in the higher interest rate environment we’re experiencing. That upfront cost, relative to the borrower’s returns, is significant,” Wilkinson said.
Wilkinson explained that before HUD’s 2017 changes, the program used a split structure with a lower mortgage insurance premium (MIP) 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 made a number of proposals on a better framework to scale up that MIP so that it better reflects the risk that the new loan brings to the MIP, ultimately opening up the program at a relatively lower cost to people who weren’t necessarily signing up,” Wilkinson said.
Irwin also supports a “risk-based pricing approach to the initial MIP” that is tied to the amount withdrawn. Without providing 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 per use, rather than this exorbitant upfront cost, then that’s where our thinking goes,” he added.
According to Irwin, the challenge is that the current interest rate environment makes the product unattractive to some borrowers.
“On the forward side, a higher interest rate means higher monthly principal and interest payments, while on the reverse mortgage side it means lower available yields for new borrowers,” Irwin said. “They can’t qualify often because the portion of the lower returns is eaten up by this flat initial MIP.”
The 2% upfront premium, he added, is especially daunting for borrowers with low dollar or discretionary credit — those looking for 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 December 1.
Wilkinson — who called the HECM program “an elegant means for seniors to access home equity” since the late 1980s — said an ideal outcome would be a reduction in bureaucracy and more streamlined, efficient processes.
As for Ginnie Mae, Jensen emphasized the agency’s core mission: “What are the goals of that agency? It is to ensure that your issuers have adequate liquidity, are solvent and can continue to service their portfolios.
“Anything that creates a more liquid market, anything that supports the solvency of the participants and makes business easier for them, I think that would be a good outcome,” she added. “So we’ll see how they react.”
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