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New Study Examines Measure to Reduce HECM Defaults
Preventative Measures: Curbing Technical Defaults. An old saying reminds us “ An ounce of prevention is worth a pound of cure.” When it comes to technical defaults for HECM borrowers we may be seeking a cure but there are some preventative measure that can be taken today. A recent study released by Ohio State University exposes some telltale traits of borrowers who are more likely to default and prescribes some possible measures to stem the tide of foreclosures due to non payment of property taxes and insurance.
The study partnered with the MacAurthur Foundation and HUD and Credability studying the outcomes of 30,000 reverse mortgage borrowers who received counseling in the years 2006 through 2011. In fact the results will be used to shape HUD’s upcoming Financial Assessment guidelines. Of the 30,000 borrowers counseled, over 17,000 actually ended up closing a HECM loan. What key characteristics can predict a higher likelihood of default? First those who take a larger portion of their proceeds up front are more likely to default. Second: credit history. A prior record of mortgage delinquencies, poor management of credit and tax liens all point to a borrower who may be more prone to default on their reverse mortgage…
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There is a significant distinction between reverse mortgage property charge payments defaults and reverse mortgage property charge payment technical defaults. Even though other reverse mortgage defaults exist, for purposes of this comment, the first type of reverse mortgage default will simply be referred to as “defaults” and the second as “technical defaults.”
In forward mortgage world a technical default is one in which the borrower has the funds to make requirement payments but chooses not generally before the value of the property is substantially less than the balance due on the mortgage. In the reverse mortgage world, the definition of a technical default looks to the principal limit available to the borrower at the time of default, not the financial situation of the borrower as in the forward mortgage world.
This distinction is a significant reason as to why HUD has made 40% of the principal limit unavailable to borrowers in the first year following initial funding unless the factual situation of the borrower meets certain exceptions. With only a 9.4% default rate as to property charge payments and not all of those technical defaults, one has to question the draconian measure taken to reduce technical defaults. Yes, draconian.
While technical defaults have been problematic during in the Great Housing Depression of 2007 through the present, we are moving into more typical times for the US housing market. What should have been a rather simple modification of forward mortgage financial assessment based on a reasonably thorough review of its own records has taken years for HUD to address and now only after OSU faculty members undertook the study.
So why eliminate Standards and modify the Saver into the the current HECM (or Savers v.2 and now v.3)? It has little to do with either technical defaults or overall property charge defaults but rather anticipated losses stemming from normal termination of Standards with full (or near full) draws years, if not decades, from the related dates of initial funding. But that is a subject for a different comment.
Let us hope that there will be a trade off of a significantly higher first year disbursement limitation for financial assessment. But do not expect a significant increase in PLFs for several years, if then.
LIKE ALL CHANGES THEY ELIMINATE MORE OF THE PEOPLE THAT NEED IT MOST,,,,,,SINCE THEY ARE DOING AWAY WITH T HE RISK THEY WILL OF COURSE LOWER THE FHA INSURANCE,,,SURE THEY WILL
What a ridiculous statement about change!! Medicare has gone through numerous changes, few, if any, eliminated those who needed it most. The same is true of Social Security.
It is amazing how few understand risk. Risk increases and decreases over time as the value of homes wane and rise. As it rises, one can reduce HECM
The older we get, the more resistant we are to change.
The program should not be forced to accept all who apply and should aggressively mitigate the number of those who would damage themselves, lenders, and the MMI Fund through property charge defaults. While you may be right about those who “deserve” the HECM program because of need, that program should not be through the HECM program since it is under the MMI Fund.
Where do you get the crazy idea that HUD “IS DOING AWAY WITH THE RISK…?” What HUD is doing is lowering risk, not doing away with it. Risk from property charge default is currently running too high in the eyes of most HECM observers so HUD is mitigating that risk through program changes rather than increasing upfront or ongoing MIP. It also increased risk through slightly higher PLFs after August 3, 2014. Perhaps PLFs can be increased, insurance premiums decreased, or even the first year disbursement limitation percentage increased but do not expect such change until it is clear that any or all of those changes can be made.
Like home values, risk is not stagnant. In the history of the HECM program it is clear there have been increases and decreases to the MMI Fund risk based on the year of origination. For example, a home with a $600,000 value today, the risk of originating a HECM back in 2006 on this home is much different than having originated the HECM last fiscal year; the principal reason for the difference is the lending limit in the respective years.
With the announced departure of Commissioner Galante and the appointment of the new HUD Secretary, it is unclear what direction the HECM will take next year. Be prepared for even more change.