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.
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.