HECMs Stuck in Reverse. HUD Considers "Two Product" Solution
Hoping to avoid another era of unscrupulous lending to unqualified borrowers, lawmakers and consumer advocacy groups have expressed concerns that the country's elderly population may become the next target for mortgage scams disguised in the form of reverse mortgages, which in FHA parlance are known as Home Equity Conversion Mortgages (HECMs).
While stories of scams and shakedowns receive a considerable amount of media attention, the vast majority of seniors happily holding HECMs are ignored. A 2006 survey on reverse mortgages by the AARP Public Policy Institute showed that 93% of respondents said their reverse mortgage had a mostly positive effect on their lives while only 3% said it was mostly negative. The same 2006 AARP Study showed that “loan costs were too high” and
that “more research is needed on how a consumers use of a reverse
mortgage changes over time as well as the long term impact of these
loans on financial well being.”
While legislation has helped
address the cost issue, industry experts would completely agree on the
second point. And the reverse mortgage industry welcomes the
additional scrutiny on the part of the HUD Office of the Inspector
General and the U.S. Treasury Financial Crimes Enforcement Network, as
they too want to rid their industry of the bad guys.
The reverse mortgage loan offers additional income and no worries about
repayment of the loan until the house is sold. From their children's
point of view, and for seniors who need or want extra cash flows, the
reverse mortgage makes sense. However, it is essential to get the facts
out there on how the program actually works as it is not for everyone.
By nature, the reverse mortgage product relies heavily on home price
appreciations and proceeds from mortgage insurance premiums to remain
Since last year, when home prices felt their first-ever
nationwide annual drop, the reverse mortgage program has been dealing with reductions in the number of seniors who are able to take advantage of the product. With the solvency of the program in question, the FHA was left with few options to restore stability to the HECM program. The only choice was to limit the amount of proceeds seniors could take out of their reverse mortgage (known as the principal limit factor).
As home prices have continued their downward spiral, another reduction in HECM proceeds coupled with a spike in premiums seniors pay for FHA mortgage insurance is still the only option that will keep the reverse mortgage program solvent. When you combine these changes with the aforementioned federal scrutiny, it is no wonder seniors are scratching their heads wondering whether or not a reverse mortgage is right for them.
Even though the reverse mortgage program has been around since 1989, it
wasn’t until the year 2000 that the industry began to experience
tremendous growth. The number of reverse mortgages insured by the
federal government increased from 7,781 in FY2001 to 114,600 in FY2009.
But that growth is starting to stagnate and decline as uncertainty
remains as to the future of the program. Hesitation and concern on behalf of seniors is obvious via falling production volumes, which as of May 30, 2010 was 55,000 loans, a drop of almost 30% from May 2009 and more than 53% from May 2008.
Greater uncertainty surrounding the future of the HECM product could not come at a worse time for our nation’s senior citizens. According to the U.S. Census Bureau, the population of Americans aged 65-years and older is projected to increase close to 150 percent between 2000 and 2050. By comparison, the population as a whole during the same period will have increased by only 49 percent. And we all know the “baby boomers” are rolling into their sixties in record numbers. The federal government provides very few non-institutionalized housing options for seniors beyond what is provided through HUD’s multifamily project-based section 8 and Section 202 programs—and those programs are targeted only for very low-income seniors.
Even as the public discourse around fraudulent activities in the program and its actuarial soundness continue to be heard, there is no escaping the fact that the reverse mortgage product helps
address a growing concern: how can we better ensure that the nation's growing population of seniors will be able to age in a comfortable and secure environment?
What better place to do that than your own home? For many families, a reverse mortgages is a win-win–the senior
take advantage of the equity in their homes that they may have spent
years accumulating and have greater ability to stay in their homes by
having access to more available cash for home repairs or other expenses
to help them age in place.
HUD has been busily researching an alternative to any further cuts in the amount of proceeds seniors can extract and whether or not escrow should be required. The lack of escrow has also led to an increase in “tax and insurance” defaults with lenders apprehensive about foreclosure and the sure to follow adverse publicity.
Among the options, HUD is reportedly considering two products: the first would essentially mirror the existing HECM product with some changes; the second product which has been referred to as “HECM lite” would in some ways resemble a HELOC. By its very name, the product would offer fewer proceeds but would do so without an upfront premium (the annual premium would remain the same).
But looking beyond the budgetary and actuarial concern, which quite frankly at $250 million is a rounding error in a proposed 2011 federal budget of $3.8 trillion, the reverse mortgage product has at its very core an essential social purpose. Without the appropriation or acceptance from OMB to the “two product solution” the reverse mortgage naysayers may very well see get their way as the HECM program would more than likely continue its long downward spiral.
That would be an unfortunate, but avoidable outcome.
Many seniors saw the value of their retirement portfolios drop during the financial crisis and have yet to climb out of their economic hole and need a reverse mortgage to make ends meet. Many are just looking for a decent quality of life and not wanting to be a burden to their families and remain at home where they can age with dignity and economic certainty.
My message is clear: OMB or the Congress needs to quickly, finally, and absolutely resolve the appropriation concern which has helped bring about too much uncertainty within the HECM program. That stalemate has been bad for hundreds of thousands of seniors who are struggling during these weak economic times and quite frankly have very few, if any, other options that offer the quality of life that the reverse mortgage does.