Archive for February, 2014

How Option Four Solves HECM NBS Problem

Monday, February 17th, 2014



Following this RMD news report that HUD is considering reworking its actuarial tables to welcome the non-borrowing spouse (NBS) in HECM transactions, an option for resolving the NBS problem I proposed in an article in National Mortgage News more than a year ago, some in the industry asked me to explain how option four solves the 25-year-old NBS problem. This post is an attempt at explanation.

Let’s begin by reviewing my January 15, 2013 proposal in the National Mortgage News Blog:

Option 4:

Reworking HECM actuarial assumptions to account for risk of eligible non-borrowing spouse. By regulation or amendment to HECM law, HUD could propose a rule to set the age of an eligible non-borrowing spouse at, say 59. It could then use this age (59) or any other age it deems actuarially sound as a variable in its actuarial formula for calculating loan limits for the borrowing spouse.

If the RMD story is correct, this is what HUD is planning to do soon to solve the NBS problem for future or prospective HECM loans. Option four would actuarially and contractually graft or incorporate the NBS into the loan, whenever there is an eligible spouse.

In other words, where there is an eligible spouse and a HECM loan transaction, there can be no NBS and no NBS problem. They would be priced into the loan actuarially, and they would be roped into it contractually.

Actuarial pricing satisfies HUD’s legitimate concern about actuarially unsound HECM loans and risk to its insurance fund, while the contractual umbrella extends protection (from displacement) to NBS, enshrined in Subjection J of HECM law. By addressing these two core issues, option four is a win-win for NBS, for lenders, for HUD (taxpayers), and for the industry.

So who is an eligible spouse? That is for HUD to define through regulation, but it could be the legitimate spouse at the time the loan is signed, whether or not they are 62 or older or 61 or younger. Even the actuarially dreadful Hugh-Hefner scenario (a 75-year-old with a 25-year-old spouse) can be priced, but the net principal limit may force prospects to look for alternatives to HECM.

Although option four removes the NBS problem for future loans, there is a downside to this solution for HECM borrowers: When they are released, the principal limit factors (PLFs) for these special-situation HECM loans could be so conservative and so restrictive as to drastically reduce the amount borrowers could receive in these transactions, as well as the volume of these loans. Perhaps, that is a good thing. Why should spouses be displaced from their homes because of a few extra dollars of debt?

Also, option four leaves existing NBS-loan problems unsolved. That is where option one in my proposal comes in (you may want  to review my National Mortgage News article at this point): HUD must take some losses on existing loans and it must use its assignment powers under HECM law to help lenders unload these loans.  Long term, that may well be a small price to pay for fixing a thorny 25-year-old problem that has been ignored until now.

The leadership at HUD deserves credit for recognizing, if belatedly, that resolving  the NBS problem now is smart HECM policy.

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