A Better Way to Manage HECM Risk & Accessibility?

Shannon Hicks June 24, 2018 1


ePath 100K RM leads

Is there a better way to manage the HECM’s biggest risk?

The following commentary does not represent the official position of Reverse Focus, Inc.

Resilient. That is perhaps the best characterization of what is commonly referred to as the reverse mortgage industry. Lenders and originators alike have faced countless changes to the Home Equity Conversion Mortgage including numerous lending ratio reductions, financial underwriting, product eliminations, and insurance premium charges. Consequently many have become conditioned to expect HUD to enact significant reforms each year, some anticipating another principal limit factor reduction this fall. While most financial institutions and traditional lenders relish an era of what many see as reduced regulatory inference, reverse mortgage professionals anticipate continued change.

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Some have argued that regional PLFs would more effectively manage HECM risks to the MMI Fund

One pivotal decision will impact the prospects of continued change- moving the Home Equity Conversion Mortgage back to the General & Special Risk Insurance (GSRI) Fund. In 2009 as a result of the Housing and Economic Recovery Act (HERA), the Home Equity Conversion Mortgage and other single-family programs were moved to the Mutual Mortgage Insurance Fund which unfortunately coincided with the housing crash. Since that time continued HECM losses within that fund have increased scrutiny of the program and triggered several rollbacks of loan proceeds and restricted product eligibility.

Last December we reported on the Urban Policy Institute’s recommendation to separate the HECM from the FHA’s Mutual Mortgage Insurance Fund. One reason cited is the wild swings in the estimated economic value of the HECM program which is extremely sensitive to prevailing interest rates and home appreciation. Such a move would require a negative credit subsidy, that is showing a positive balance or no need for additional cash appropriations from Congress.

In it’s 1995 report to Congress entitled, “Evaluation of the Home Equity Conversion Mortgage Insurance Demonstration”, HUD states, “Overall, the HECM Demonstration has been designed to break even. It is not intended to be a subsidy program.

Download the video transcript here

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One Comment »

  1. James E. Veale, CPA, MBT June 25, 2018 at 9:17 am - Reply

    Shannon,

    Excellent presentation on a difficult subject. As a proponent of community (or geocentric) principal limits, this is the only way one can address the risk that is inherent in home appreciation rates. What most influences the appreciation rate? The three things that influence the price of a home the most is: 1) Location, 2) location, and 3) location.

    My father bought his home in 1951 and my father-in-law bought his in 1954 and they are located in large Metro Statistical Areas that are about 1,700 miles apart. Both had about the same value at the time of purchase and the structure and quality of materials used were about the same. One of these homes has increased in value at 6.1% per annum and the other has increased in value at about 3.5%. Since both home structures have been maintained about the same and are of about equal size, why is one worth about $650,000 and the other only $110,000? We all know the difference of $540,000 is tied up in the land, that is the location of the properties, not the quality of the soil that the structures sit on.

    PLFs by communities (not lending limits) by nine digit zip codes (or other readily easy and meaningful division of communities) provide the best protection against the home going “underwater,” the common malady of HECM termination. This concept would open up some areas of the US to more originations while stifling others. Yet if endorsement production were the same as now, HECM with community PLFs would have much lowere losses at termination than those without.

    Are there drawbacks? Most certainly! Will all HECMs with community PLFs terminate without reimbursement to lenders? Not at all, however, overall what should happen is losses at termination should be far LESS for those HECMs originated with Community PLFs than without them.

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