Rewind back ten or fifteen years ago and you would have never imagined that the reverse mortgage would look as it does today. No other mortgage loan has seen such a dramatic transformation of its core components than the Home Equity Conversion Mortgage. If the constant evolution of the HECM proves one thing it is the growing need for older homeowners to convert a portion of their home’s value into a source of cash flow.

While it’s uncertain if or when three key significant HECM changes will be implemented, what’s undeniable is that more senior households are facing a cash-crunch in retirement. Lawmakers have few viable solutions outside of home equity that could avoid financial insolvency for older homeowners- a fact that may have spared the HECM program the ax some lawmakers had been willing to swing.

HECM professionals can be thankful for one gift this year- no announced further reductions of lending percentages or principal limit factors. Despite HUD’s lack of detailed data for why each loan was terminated or placed into default, the agency is confident that previous reforms like the Financial Assessment and PLF reductions have helped slow losses to FHA’s insurance fund.  However, such improvements remain difficult to measure until a larger statistical sample of recently-terminated loans is available and HUD’s aging technology is modernized. What is certain is that the housing crash of 2008 combined with full-draw fixed-rate loans sowed the seeds of HECM losses and FHA insurance claims that have afflicted the program in recent years.

Today the HECM has been transformed into a more robust program that has not only repaired most structural weaknesses but preempted many future risks. Who could have anticipated such a remarkable journey?

As we closed out a tumultuous 2018 reverse mortgage professionals were not anticipating a blockbuster month for HECM endorsements. However, many were taken aback when December endorsements came in at a meager 1,751 units. Even factoring in the government shutdown which halted endorsements on December 21st, estimates would have only placed us at 2,300 plus units had the government remained fully operational. A record low by any measure. In fact, December was the lowest monthly volume of HECM endorsements since 2004.

Suffice it to say, 2018 ended with a whimper after a year of slumping volumes. Most industry participants rightly point to the trifecta of changes enacted on October 2nd, 2017 as the primary culprit for lackluster loan volume. The brutal truth is that 2019 will continue to test HECM professionals and lenders alike, albeit not an insurmountable challenge.

Jumbo Reverse a Respite for Some

Originators in high-value markets such as California and Washington state stand to benefit in originating private jumbo reverse mortgage loans while decreasing their dependence on the Home Equity Conversion Mortgage. However, most will find themselves working harder not only to prospect older homeowners but the shrinking pool of those with enough equity to qualify.

Future value of HECM program

The specter of increasing ‘losses’ from HECM loans in FHA’s portfolio has been with us for several years and will continue. A dearth of more specific data for HECM insurance claims by real estate market, product design (fixed, adjustable, etc), and average home appreciation rates have left many wondering how countless reforms have failed to stop the bleeding. Such data would help pinpoint the factors contributing to losses in the HECM program. Truth be told, the economic value of the Home Equity Conversion Mortgage will continue to vary significantly each year as its future valuation is extremely sensitive to current interest rates and home appreciation.

And speaking of appreciation, while the application of a national PLF for all HECM loans may be easier to administer, it also increases the likelihood of loans in markets with little or no appreciation resulting in an insurance claim. The result- PLF reductions for all borrowers- regardless of their market or historic appreciation rates.

What lies ahead this year?  Expect increased scrutiny of HECM foreclosure timelines, more effective verification of borrower occupancy, and a final determination of the effectiveness of the second appraisal rule.