HECM Savers – More Than a Scaled Back Version
The HECM Saver was announced in mid-September, incorporating extremely low initial insurance
premiums as an encouragement to borrowers who were looking for a scaled back version of the
Figure 4. Principal Limit Factor
Comparison Between Saver and
Standard HECMs at Various Ages,
as of Oct 2010
According to discussions with HUD officials, the agency felt that many potential borrowers were
discouraged by the initial costs of the HECM, and that, by offering a low-cost alternative, the
market for the HECM product could grow. In exchange for lower initial premiums, these mortgages
carry lower PLFs than the Standard product. HUD's view was that the lower risk required lower
insurance premiums, especially initially.
These Saver mortgages feature the same ongoing mortgage insurance premiums as the Standard
product – monthly premiums on new mortgages that were raised the same time the Saver product
We believe that this product will stimulate more seniors’ interest in HECMs, especially among
younger potential borrowers. In many ways, this product could become a "taster" for borrowers
seeking additional cash, but unwilling to take on a larger debt burden. Use of this product as a
precursor to a Standard HECM has been strongly discouraged by industry leaders. However, if
this product became a stepping stone onto a Standard HECM, then we would expect refinancing
activity to be considerably higher than that found in the Standard product.
The product appears more targeted toward a younger borrower. The Saver HECM PLFs run as
high as nearly 85% of that for the Standard product, but less than 80% for older borrowers (see
Figure 4). The difference between younger and older borrowers diminishes considerably in higher
interest rate environments and actually inverts due to potential interest accretion over a longer
period for younger borrowers. On the whole, the Saver HECM's PLFs average about 79% those of
the Standard product.
In designing the new HECM products, HUD spent considerable time evaluating refinancing
potential between products. In its guidance for brokers, it offers several examples of how
refinancing should work and refinancing software was made available.
Ginnie Mae President, Ted Tozer, stated during the annual NRMLA conference in November that
he envisioned seeing this type of HECM at about 30% of loan endorsements. We believe that this
estimate may be optimistic; however, it sets a gauge of how important the product is to the
industry and to HUD to ensure its success.
One of the offsets to this product, in our view, lies in the high ongoing insurance premiums. While
the initial premium is a virtually nonexistent 0.01%, or one basis point, the ongoing premium is still
an expensive 1.25%. Borrowers switching from a Saver HECM to a Standard HECM will be
required to pay the difference between the 1bp initial premium and the 2% for the Standard
For refinancing, the dollar-value of the initial mortgage insurance premiums (MIPs) are offset
against each other, which would benefit the borrower to a degree if house prices fell (and the
maximum claim value with it), but for most borrowers we believe that a drop in house prices would
prove less motivating to switch, thereby keeping refinance rates lower than might be expected.
Certainly, borrowers looking to switch from a Saver HECM to a Standard one would see virtually
no benefit from offsetting initial mortgage insurance premiums, given the small initial MIP the
borrower pays for the Saver HECM.