Have four principal limit factor reductions, a financial assessment, first-year distribution limits, and a collateral risk assessment with a potential second appraisal helped improve the Home Equity Conversion Mortgage program? Recounting these changes it’s clear to see the speed at which the HECM has been tinkered with, modified, and in many cases transformed.
The question is did it work?
A recent column by Chris Clow in Housing Wire’s Reverse Mortgage Daily summarizes the findings of a study commissioned by HUD’s Office of Policy Development and Research in 2022 which was completed by the analytics firm SP Group LLC and its subcontractor Econometrica Inc and released in late 2023. The study sought to measure the effectiveness of policy changes from 2000-2020 and the outcomes for borrowers, the program’s financial health, and policies.
Reverse Mortgage Daily’s summary notes the growth of the HECM program as endorsements surged from a modest 6,640 units in the fiscal year 2020 to a high of 114,692 endorsements in the fiscal year 2009.
While FHA’s study notes the appreciable impact of the housing crash in suppression endorsement volumes it does not mention the market disruption and subsequent reduction of HECM originations in the wake of major bank exits that included Wells Fargo and Bank of America which decimated our largest distribution channel.
HECM ‘Losses”
Did the HECM insurance claims and operating costs exceed the insurance premiums collected from 2000-2020? The report notes, “For the 533,894 HECM loans that originated and terminated during the 20-year period, the estimate shows that FHA incurred a net loss of approximately $10.4 billion, or $19,556 per HECM loan”. The bulk of losses came from loans that originated between 2006 and 2010 at the height of the housing market bubble and the depth of the crash.
However, it’s difficult to determine losses between 2006-2009 since HECMs insurance premiums and claims were in the General Insurance and Special Risk Insurance Fund until 2009 when the program was moved to FHA’s Mutual Mortgage Insurance Fund.
A Perfect Storm of Future HECM Claims
One event may have contributed to HECM insurance claims in the years following the housing crash. Mortgagee Letter 2008-08 issued March 28, 2008. The mortgagee letter clarified HUD’s position on offering fixed-rate HECMs which could be open or closed-ended loans.
In 2008 the fixed-rate full-draw standard accounted for only 20% of HECM endorsements according to the Consumer Financial Protection Bureau’s report to Congress in June 2012. The report notes by 2010 as home values continued to fall nationwide 70% of all HECM originations were standard fixed-rate full-draw. The higher available gross loan proceeds and the generous premiums on the back end of the loan made the HECM Standard the popular choice for lenders and borrowers alike. The CFPB noted the average expected rate was 5.1% in fiscal year 2011.
The growing cohort of fixed-rate full-draw HECMs dramatically accelerated HECM loan balances as home values suffered their largest losses in a generation. It wasn’t until 2013 that the standard HECM fixed-rate loan was removed as part of the 2013 Reverse Mortgage Stabilization Act. The timing of the standard fixed-rate full draw HECM seemed odd considering home values began to soften when the first waves of the subprime mortgage crisis began to push home values down in late 2006.
Did PLF Reductions Work?
It should also be noted that before a series of principal limit factor reductions in 2009, 2010, 2013, and 2017 younger borrowers could get as much as 65% of their home’s appraised value with the oldest borrowers with PLFs as high as 95%. Did the PLF reductions have their desired effect? The report noted the first and second PLF reductions in 2009-2010 reduced net losses and reduced unscheduled draws. Next, the 2013 PLF reduction had little impact on consumer demand or losses. However, according to the study the 2017 PLF reduction reduced net losses without impacting loan demand.
The Financial Assessment and Second Appraisal
The enactment of the Financial Assessment which measured a HECM applicant’s willingness and financial capacity to pay their ongoing property taxes and insurance to avoid default likely reduced program losses however the study was unable to determine the actual net benefit. How much did second appraisals when required as part of the HECM’s Collateral Risk Assessment reduce claims? The study found the policy was estimated to have been associated with reducing net losses by $991 per loan- a marginal improvement at best.
However, the introduction of the HECM program analysis report is clear on this point- of loans that originated in 2013 and beyond and have also been terminated, 95 percent of loans on average have resulted in net financial gains for FHA. On its face this would validate the effectiveness of the Reverse Mortage Stabilization Act of 2013.
The HECM program analysis while enlightening on some points leaves many questions to be answered. What are your thoughts on the effectiveness of HUD’s changes to the Home Equity Conversion Mortgage program? Chime in the comment section below.
Shannon Hicks
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
2 Comments
The following comment made on May 23, 2024 were based on Chris Clow’s article alone. Chris summarized the report while Shannon focused on a few key points. I will comment on Shannon’s commentary later today. As summarized by Chris, the report seemed biased and those writing the report seemed uninformed about specific aspects of HECMs.
.
“As to borrowers, the ratio may be correct as to single men versus single women but then one has to consider joint borrowers. As to the composition of the joint borrowers, the number of men is most likely about equal to the number of women. Using that assumption, the percentage of women borrowers to men borrowers drops to 58% for women and rises for men to 42% through March 31, 2024.
.
As to the number of borrowers this loan has helped, the number is well over 1.8 million as of March 31, 2024. Mr. Selleck (and his script writers) was a little late to HECM advertising. The number of borrowers reached one million sometime in the 4th quarter of calendar year 2011. HECM endorsements reached one million in the 4th quarter of calendar 2016.” (My estimate of borrowers is most likely somewhat low since I only assumed two borrowers per joint loan. On the other hand the HECM endorsement data is based on HUD statistics.)
.
“Someone will have to explain to me how loan proceeds that have to be repaid to HECM mortgagees are actually income to anyone. Perhaps they meant cash inflow to borrowers and cash outflow to lenders (at least at the time of closing). As an industry originator used to say: ‘Every time our credit card limits goes up, my wife excitedly tells me how much more income we are making this year.’ Not hardly.
.
The study says: “In addition, a high proportion of borrowers draw down large amounts of their HECM line of credit within the first month.” The explanation is easy. That phenomenon is not mysterious. It results from the mandatory payoff of existing liens on the property at closing. Only a relatively low percentage of HECMs close with no payoff of liens on the collateral.
.
As the last item addressed in this comment, let us look at the assumption that HECM borrowers have low income. If the researchers are relying on the accuracy of HECM loan documents for this information especially for HECMs endorsed before 2015, they are relying on notoriously understated income information. Before financial assessment, income was poorly traced and reported. Even after financial assessment, at the point that the borrower meets the residual income test, further information is not generally rounded up. Yet few HECM borrowers make exorbitant amounts of income. Surely, HECM borrowers in the eyes of HUD are among the underserved in this country.”
Excellent points, Jim. Thank you.