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A Perversion of the HECM?


AARP Frowns Upon Strategic Use of HECM in Portfolio Management

aarp-1Creativity unlocks potential markets and opens up possibilities. It also makes you a target of critics. In recent years the long overlooked principal limit growth factor (or as many refer to it as the line of credit growth rate) has garnered a second look by financial professionals and our industry as a potential means of managing risk in a retirement portfolio.

“The use of reverse mortgages to hedge investment portfolios is a perversion of the original intent of the HECM Program, a misuse of FHA insurance, and puts the FHA insurance fund,” wrote AARP in a recent post. “HUD should take steps to ensure that homeowners who need money have access to HECMs, but should prohibit the use of HECMs for portfolio hedging.”

A perversion of the HECM program’s original intent? We have revisited the Home Equity Conversion Mortgage’s intent citing the language in which the program was created. Nowhere does it mention…

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  1. AARP’s reasoning can be compared to the “Intent to Purchase an Annuity Disclosure” that we are all familiar with.
    There is something to be said for an alternative HECM retirement funding strategy wherein a HECM line of credit is established early on and then the Portfolio under management is exhausted first before tapping the hecm line of credit to fund retirement. Portfolio management fees and costs and Income Taxes are reduced and interest accrual on the hecm is deferred until much later in retirement.
    Regardless of the strategy the secret is to establish the Standby Line of Credit early on in the process.
    I know this is blasphemy but placing some constraints on the line of credit growth is not out of the question.

  2. If there is evidence that using HECM as portfolio hedge endangers the HECM insurance fund, then HUD will consider placing restrictions on this novel use of HECM. But restrictions on creditline growth use will hurt loan production and industry growth.

    • ? Of course it will “hurt hecm production and industry growth”…. but these are not the intent of the housing program.

    • Atare,

      Here is what AARP says the growth rate on a HECM is: “The growth rate consists of the interest rate, plus the mortgage insurance premium, plus a fixed margin charged by the lender that is specified at loan origination.”

      This is nonsense.

      First, the growth rate is applied monthly, not annually so the sum of the applicable items must be divided by twelve.

      Second, the interest rate includes the so called fixed margin. So why does AARP say that the margin is added to the interest rate?

      Please remember for years AARP oversaw counseling which educates on how the line of credit grows. Yet AARP cannot even get the components of that rate correct? Is all of AARP really that ignorant or is this a proposal by those who do not know anything about HECMs at AARP? It seems like the latter.

  3. Wow. There’s so much wrong with this line of thinking, it’s hard to know where to begin. Only allow the HECM Line of Credit to those who “really need the money?”

    I suppose they mean “really need,” as opposed to “really, really need,” or do they mean “REALLY need,” or maybe they’re trying to say “Really NEED.”

    I’m not sure but it seems like that’s going to really need some clarification… I wonder if there will be a new federal agency involved… The Bureau of Need Assessment, perhaps?

    If I have a HECM that came with a line of credit because I wasn’t able to receive all the cash from the loan in year one, and I also happen to have an IRA that’s invested in the S&P 500… and the market has a downturn causing the S&P to fall by 20% that year… and so I use my line of credit instead of taking funds from my IRA that year in order to avoid making my 20% loss for the year into a 27% loss, thus shortening the life of my IRA by couple of years…

    DID I REALLY NEED THAT MONEY… or did I merely need it?

    And if I can’t use MY OWN line of credit to extend the life of my portfolio, doesn’t that mean that I’m more likely to run out of money sooner? And if I run out of money sooner doesn’t that increase the likelihood that I’ll find myself unable to pay my other bills… like property taxes, insurance and normal maintenance on my home are three that come to mind.

    So, if AARP is correct and the purpose of the HECM was to allow retirees to age in place by remaining in their homes for life, how is this idea not compromised by a policy that would make it that much harder for someone to do just that… remain in their home for life?

    I could go on and on… I mean, what if my portfolio is only $10,000 and my line of credit is only $15,000… those are hardly the sort of numbers that make one think of someone who doesn’t need money, right? If you have $1 million in a 401(k) does that make you rich and therefore not deserving, according to AARP?

    There’s also the obvious little nits that come to mind… like it’s MY equity that we’re talking about here. Mine. Who the heck is AARP, or HUD for that matter to tell me how to use my own home equity?

    What if I want to use some to buy a new car. Do I have to prove I really need it, as opposed to merely wanting it.

    And yes… it’s an FHA insured, non-recourse loan, but last time I checked, FHA does sell the insurance component to the borrower, and for a tidy sum, I think you’d have to say.

    Yes, I know that FHA lost $1.9 billion in 2009, if I’m remembering correctly, and $900 million was attributed to future expected losses on HECMs. I’m pretty sure that’s right.

    Am I the only person that finds those losses remarkably small, considering they resulted from an economic collapse not seen in this country in 70 years?

    And aren’t retirees who have portfolios that are invested in equities more likely to be financially qualified and therefore more likely to never default on the loan? One would certainly think that’s the case.

    Maybe AARP is trying to level the playing field by making everyone poorer? I’m not sure.

    What I do know is that the nice, caring, and apparently simple minded folks at AARP, REALLY NEED to get a macro ecomonics class under their proverbial belt. (As a matter of fact, micro would hurt them any to boot.)

    • Excelleant points!

    • Martin,

      Where do you get the idea that AARP stated: “So, if AARP is correct and the purpose of the HECM was to allow retirees to age in place by remaining in their homes for life….” AARP did not state that in the Public Policy statement! This is a made up concept of the industry, FHA, and allegedly Ronald Reagan but Congress gave a clear purpose statement in the law which few other statutes have. You can read the purpose statement at 12 USC 1715z-20(a) as correctly quoted by AARP in the Public Policy statement.

      Let me apologize for the confusion my peers have troubled you with. A HECM has absolutely nothing to do with equity in these days other than as real estate math. Decades ago, HECMs had SAR agreements, i.e., Shared Appreciation Rights. Sharing home appreciation with anyone is a true equity transaction. A HECM is a non-recourse mortgage; it is not an equity transaction. As to today’s HECM, the homeowner has the same equity rights as with any mortgage but that is not true when it comes to SARs. So how is any senior spending equity? That is industry propaganda and myth.

      You state: “…last time I checked, FHA does sell the insurance component to the borrower….” Where do you get that from? Please tell us where we find that contract. That agreement is only between the lender and HUD. HUD has a mortgage agreement with the borrower as a just in case HUD has to take over the loan but there is no insurance agreement in that document. The FHA loan agreement with the borrower is simply a duplicate of the mortgage agreement that lenders have with the borrower. FHA insurance costs are a pass through cost of the lender to the borrower just like the appraisal fee or title insurance. If the policy was between the borrower and FHA, loss reimbursement would not be paid to the lender but to the borrower.

      You again state: “Yes, I know that FHA lost $1.9 billion in 2009, if I’m remembering correctly, and $900 million was attributed to future expected losses on HECMs.” Where do you get that from? it is exactly wrong. The HECM had a profit that year of $909 million per the independent actuaries’ and auditors’ reports for the fiscal year ended September 30, 2009. In fiscal 2010, HECMs had a loss of $3.16 billion loss. Part of that $3.16 billion loss was an update to the estimate on the fiscal year book of HECM business. The following is what you are remembering.

      In mid 2009 after HUD submitted its budget estimated for fiscal 2010, the new Obama OMB stepped forward and said that HUD was missing the boat on its estimate of results for the projected book of HECM business for fiscal 2010. OMB turned the HECM estimates back to HUD for revisions either to the program itself or as a request for a subsidy of $798 million. HUD instinctively lowered the Principal Limit Factors by about 10% for fiscal 2010 and declared the book of business for fiscal 2010, fiscally neutral.

      I am now tired of reading and being surprised by your errors. I believe in the growth in the line of credit as well but believe that the current line of credit needs change. It is funny to read that AARP is proposing that somehow HUD police HECM withdrawals for appropriateness, whatever that means in this context. How lenders can oversee whether or not borrowers have a certain level of investments would be a marvel. Imagine the increased interest rates or new round of servicing fee set asides to cover such costs.

      So while we believe in much the same, we believe it for very, very different reasons.

  4. It’s been my suspicion for years that it was the Credit Card lobbyists controlling Democrats on the Federal Banking Commission that helped foster the HECM Financial Assessment rules and I suspect that contributions by this same source may well dictate this recent AARP challenge to the HECM LOC application.

    If one closely examines the beneficiaries of each consequence, effected and proposed, credit card companies rise to the top as the financial group that stands to benefit the greatest by each of these changes, not the FHA.

    Just a few years ago, financially pressed seniors had non-credit access to funds through the HECM. Once in the program, credit card companies lost their ability to collect as a BK was a fairly easily solution for impossible noncollectable CC debt and a household lien was virtually then became frustratingly virtually noncollectable, too. The new, imposed FA rules certainly negate that possible hedge on most seniors that are financially depressed and burdened with high credit payments, whether or not their need was intended to be an abusive avoidance. They just needed money to survive.

    As to the latter discussed, if the LOC is used by wealthier clients under financial management, which lending institution alternative would they turn to during a down-market crisis? I believe most readers would concur that maxing out credit cards is most likely become the first event to occur as it is frequently the “most convenient” alternative.

    It has been a long standing fact that credit card companies are willing to plunder any social group without an ounce of remorse. Rich, poor, even the class of unemployed youth referred to as “college students”, become easy prey as available credit and virtual plastic purchasing power temptation became readily available.

    I don’t trust AARP, but, then, that’s just my opinion 🙂

    • Jeff,

      The credit card lobbyists, really? So how do you get from a Congressional committee to FHA?

      As to bankruptcy, HECM proceeds go into suspension during the period starting with a petition (no matter what the source) through adjudication.

      Financial assessment comes from the demands of HECM lenders not credit card companies. Both Wells and MetLife left over not having financial assessment. Of course getting financial assessment late did not and could not guarantee that these two huge lenders would come back.

  5. Excellent post, Shannon. Our friends in the financial planning world have proven the viability of this strategy for the mass affluent. This is indeed the proper use of the product, as it creates a more sustainable retirement solution for older homeowners.

    This is something AARP should be excited about!

    Yet, AARPs current website describes themselves as “a nonprofit social welfare organization.” Sadly, their mission has shifted away from retirement strategies and toward discount coupons.

    • Dan,

      What proof? Nothing has been proven otherwise the CFPs alone would be flooding us with referred applicants.

      What the financial community has provided us with are demonstrations of likely outcomes at low risk using HECMs in various strategies. Proof will come when actual loans have terminated that were clearly used in facilitating some of these strategies.

      Our industry has a tendency to pull the trigger before the target is even seen. Look at the predictions regarding 1) the Extreme Summit, 2) the dominance of proprietary reverse mortgages by the end of 2010, 3) fiscal 2011 as the year we return to 100,000 endorsements, or 4) recovery in endorsement numbers this year!!!

      There is no proof. The financial community has provided well demonstrated theories with low risks. But for example, the Sacks brothers theory will fail in a sharply rising or high plateau interest rate environment.

      The claims we make show how desperate our situation as an industry really is. The more we claim theories have been proven with no empirical or insufficient circumstantial evidence to back those claims, the more our desperation shines apparent to those outside of our industry.

  6. Sorry, should have proof-read! Adverbs and grammar ran amok. jf

  7. It is somewhat surprising that given the significant issues out there in the health care / insurance arena, AARP has the time and resources to pour into this product.

  8. IN my opinion, AARP is a very powerful lobby. It has never been friendly to HECMs. This is a thinly veiled attempt to steer older Americans away from HECMs into one of their (sponsors) financial products and should be seen as a conflict of interest for them to even comment on this. Our industry should do everything it can to combat this deception.

    • James,

      Why is there any conflict of interest?

      AARP does not offer reverse mortgages just like the reverse mortgage industry does not offer income or growth insurance products. Even though there is a growth rate on the available line of credit, that is a growth in the amount available to be borrowed not income or increased equity that can be sold by the borrower.

      You may see AARP as a competitor, but they are primarily a senior consumer advocate. They have every right to attack the growth in the line of credit as endangering the MMI Fund. In its present state, they have a point.

  9. Excellent insights and comments by all. Thank you for contributing!

  10. Someone might also want to point out to AARP that people losing money that is invested in equities is not good for those individuals or for the economy as a whole.

    When someone’s 401(k) account experiences losses they have a very definite tendency to spend less on other things, so the local dry cleaner suffers, as does tourism, Home Depot sales, local restaurants, etc… and when these businesses see their revenue stall or fall, they tend to lay people off or hire fewer employees.

    It’s no different than someone’s home falling in value… it’s bad for everyone.

    If someone can use the HECM line of credit to extend the life of their 401(k), that means more money invested longer… and that’s good for everyone, including other investors like the teachers’ pension plans, et al.

    Extending the life of a retirement account means reduced likelihood of running out of money before reaching life expectancy, which is everyone’s biggest fear these days.

    Never before have people been faced with today’s retirement realities… such as being prepared to live for decades after retiring, health care costs that continue to skyrocket, far fewer defined benefit pension plans offered to workers… a near-zero interest rate environment that makes saving harder… the list could go on and on.

    The HECM’s purpose is to increase the likelihood of someone being able to age in place, meaning remain in their home throughout their retirement years, and that’s what it does.

    The HECM line of credit is just a part of what allows people to remain in their homes longer, and one of the ways it can do that is by making it possible for someone’s retirement savings to last longer.

    No matter how you slice it, that’s not only a very positive thing for everyone, but it’s also very much in-sync with the purpose of the HECM program.

    AARP should understand retirement better than they seem to, as evidenced by their position on what is and isn’t an acceptable use for the line of credit.

    From reading their statements, it seems as if they think that someone with money invested in the stock market is “rich” and therefore shouldn’t be allowed to benefit from what the HECM program offers.

    As I said earlier, there’s just so much wrong with that line of thinking that it’s hard to know where to begin… or end.

    • Martin,

      Again we disagree. The authors of the AARP 2015-2016 Policy Position on HECMs have it right. This is not about allowing seniors to live in their homes all of their lives. That can be done in a lot of other ways and better as well. The HECM program is about allowing seniors to have access to cash through a nonrecourse mortgage. These are very, very different purposes and at times can be contrary to the other.

      You state that falling values in investments is no different than “someone’s home falling in value.” But if someone already has a HECM whose value is less than the balance due, there is a huge difference between the value of the home dropping more and the value of that senior’s investments dropping anymore. The banker is just fine but the MMI Fund could be hit, if the value of the home is not recovered in the future. So there are differences depending on a number of variables.

      HUD’s position is that HECMs are for the cash poor but house rich. Where do they get that position from? As Shannon says, neither the law creating the program nor the regulations and rules guiding it make such a distinction.

      So again we agree but for very different reasons.

      • Cynic… I’m just not following you here.

        The MMI Fund could be “hit” because someone used their LOC to reduce losses to their IRA or 401(k) account?

        Walk me through why using the LOC for that purpose is different from using the funds for some other purpose, as related to the MMI Fund being “hit.”

        And how do we define “cash poor?” Or, “house rich?” I mean, I’ve read several studies recently that showed the average balance in a 401(k) among those over 65 to be well under $200,000 and some studies show that number to be closer to $100,000.

        And besides that sort of data, I’d have to argue that in the near zero interest rate environment in which we now live… essentially every retiree is “cash poor.”

        As I understand it, the only time FHA experienced losses on the HECM program was in 2009, when they said that they were forecasting $900 million in future losses.

        Isn’t that just part of the losses EVERYONE experienced when our economy crashed and home prices fell by half? Fannie lost something like $200 billion… others went under… isn’t $900 million a relatively small loss considering?

        And was that loss caused by home values that were cut in half… or the HECM itself?

        Where’s the data to answer these sorts of questions? Is FHA still forecasting the same losses to the program going forward, or have market and program changes affected that forecast?

        How many HECMs are defaulting due to non-payment of property taxes today? And how many of those were the result of underwriting, as opposed to being caused by life events that weren’t foreseeable?

        And how does the purpose for using the LOC lead to the MMI Fund being hit?

        I wasn’t comparing a drop in home value to a drop in something else, I was merely saying that for retirees, losses are losses, and anything that they can do to reduce losses will increase the chances of them being able to maintain their lifestyles throughout their retirement years.

        But, I’d certainly like to hear your thoughts in response…

        • Martin,

          Please see my response below.

      • Oh, and one more thing… what are the “lots of other ways” and “better” ways that seniors can remain in their homes for life?

        I agree with you in at least one way… the purpose of the program is to give seniors access to cash based on the equity in their homes through a non-recourse loan. Some people will use the HECM to be able to stay in their homes, others will use the HECM to hold onto more of their cash when downsizing…

        I could probably come up with hundreds of potential purposes for using my equity, some you might agree with and others you might not think highly of, but so what? It’s my equity so isn’t is my decision how I use it?

        • Martin,

          My response is below.

  11. If you thought the battle over non-borrowing spouses was over, you better see the AARP Public Policy positions related to HECMs. They seen comfortable with HECMs which have post August 3, 2013 case number assignments but not HECMs with case numbers assigned before August 4, 2013.

  12. Cynic… Look, I appreciate it when you or anyone else, for that matter, provides facts or corrects something I’ve stated incorrectly, but I’m having a hard time understanding your point.

    1. For example, I said that “… the purpose of the HECM was to allow retirees to age in place by remaining in their homes for life….” You said that’s incorrect and provided the link to the code section… so I looked it up and here’s what it says…

    “… a program of mortgage insurance designed to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets…”

    Obviously, you’re seeing some difference between the way I phrased it and the way the code is written, but I don’t and can assure you that most people wouldn’t.

    “… reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income,” IS a program designed to allow retirees to remain in their homes as they age, their income is reduced and their expenses increases.

    It’s the same thing, or at least I don’t understand where you are seeing a relevant distinction between what I said and what’s written in the code.

    2. Likewise, you talked about “shared appreciation,” and say that without it there is no equity transaction. Then you say that the senior is not spending equity?

    I just don’t understand what your point is… seniors with a HECM are spending the equity they’ve accumulated in their homes… the HECM converts home equity into cash… what do you mean by an “equity transaction,” and how is it relevant here.

    3. Next, I pointed out the the borrower is paying for the FHA insurance and you point out that the FHA insurance contract is between the lender and HUD.

    Your point represents a merely distinction without a difference.

    My point was that borrowers are paying for the insurance… and they, in fact, ARE. Borrowers also benefit from that insurance because without it, besides the facts that there would likely be no HECM program, it allows for the loan to be non-recourse, right?

    The technical distinction you’re making only confuses the point, in my view. The borrower pays for it, and benefits from it. If FHA, like any insurance company, is experiencing losses, I assume they will increase the cost of the insurance.

    4. Your next comments on the losses from the HECM program, I very much appreciate, and I’m hoping you can point me at the data so I can review it historically and going forward.

    I can’t tell whether the losses you reference are all actual, as opposed to actuarial forecasts. Nor can I tell whether those losses were the fault of the HECM, or the worst economic downturn in 70 years that saw home prices drop by 50 percent all over the country.

    But, I want to know, so anything you can do to help me find the data would be very much appreciated.

    (I’d also love to know, how many HECMs end in foreclosure because of non-payment of property taxes, and how many end in foreclosure because there’s no equity and the heirs don’t want the house.

    5. Lastly, it seems that we somehow agree that AARP suggesting that use of the line of credit should be policed based on “need.” It’s a ridiculous idea that could never be administered effectively.

    It also sounded like you had other concerns about how the LOC is structured, and I’d like to know what those concerns are, but you waste time with irrelevant distinctions that don’t address the topic of the discussion. It’s no wonder you get so tired that by the end, it’s almost impossible to understand what you’re trying to say.

    Well, rest up. I’m always available for a well thought out discussion or debate, and it would seem that you would be a valuable person with which to converse in that regard.

    • Martin,

      1. You state that the HECM program “IS a program designed to allow retirees to remain in their homes as they age, their income is reduced and their expenses increases.” Yet the purpose clause does not say anything about the senior living in the home. This is a mortgage. It is as if you are saying the uniqueness of this mortgage is that it is the only mortgage designed to allow its borrowers to remain in their homes as they age. There are far more 30 year fully amortized mortgages that have achieved this that than HECMs! The unique feature of why Congress created this mortgage is found in the purpose clause. To that extent it was purposefully designed to provide cash flow in retirement and is insured by FHA, which makes it unique.

      2. Then you ask if it is that I am saying that seniors are not spending their home equity? I have no idea. Actual equity will be determined at the sale of the property. Up until then it is estimated. Why is it estimated? The debt amount is normally easily determinable if all of the needed facts are available. As to the value of the home, it is only estimated. Until the home is sold, we do not have enough facts to determine if actual home equity is being spent or not. On the other hand when those who participate in a Rex Agreement spend their proceeds, they are spending home equity since they have given up part of one of the rights in homeownership, retaining all of the appreciation on the home.

      What I can tell you about the debt proceeds seniors are spending from their HECM available line of credit is that it is debt proceeds because they increase the balance due on a debt. Until the house is sold, can anyone really say they are spending home equity? With a HECM taking all or a portion of the available proceeds in the line of credit after the loan is closed has absolutely nothing to do with whether home equity is positive or negative. What is available is found in the mortgage documents, making the proceeds debt proceeds, not home equity!!

      3. Are you keeping up to date? Many times after paying the upfront MIP, lenders are not charging borrowers for that cost. So please explain how borrowers are paying that cost other than in higher interest rates which do not insure lenders will be reimbursed in full. One lender in the past paid the ongoing MIP for their borrowers who were also members of their credit union without charging it to borrowers.
      Perhaps you see a distinction with no difference but I do not. Zero upfront costs are better than even upfront MIP. If you do not see this financial reality, it is no wonder it is so hard for you to follow.

      Yes, a HECM would be nonrecourse without FHA insurance as are ALL reverse mortgages originated after the early 90s. Read 15 USC 1602(bb). It says all reverse mortgage transactions ARE non-recourse transactions. Please find in the FHA contract that borrowers sign that when the insurance is paid, the note is nonrecourse; let me save some time, there is no such contract. There are times when the lender loss is NOT paid in full because of not doing their due diligence in making the loan meet HECM requirements.

      It is obvious you have no experience with insurance on contracts of an insured. It is the insured that is the policy beneficiary, not the customer. Yet the policy covers a loss on the contract IF the insured meets minimum requirements.

      It is the model HECM mortgage documents that guarantee nonrecourse to borrowers. The lenders guarantee to the borrowers that they will not pursue any recourse through the courts.
      It is your view but what is that in a court of law. This subject is about law not how you view things.

      4. The fact is the downturn was the worst in American history.

      It is clear you have never read an actuary’s report, the report shows things in broad strokes and does not categorize the losses as you desire. Since I have provided the citations, you can read what the actuaries say about the profit in fiscal 2009 and the enormous loss in fiscal 2010. This is not just about losses.

      If you want the information on the categories of foreclosures, you will have to contact HUD as it does not provide that information in its public postings on HECMs.

      5. If you understood the HECM financial model at inception, you would be in an excellent place to understand the drastic changes it has gone through. One of the key formulas used to be that the available line of credit had to be equal to the principal limit minus the balance due minus the sum of all amortized set aside amounts, all as of the same date. Today, the line of credit can grow to any unrestricted amount.

      To do all of the math, one has to understand exponentials and the different ways HUD has defined what we euphemistically call the growth rate. So to a limited degree I agree with AARP that the line of credit increase must be modified but unlike AARP, I do not believe it need be eliminated. It just needs to go back to the way it was designed. Servicers just need to learn how to explain reductions to the line of credit.

  13. First how does one use HECM proceeds to reduce the loss on a 401(k)? That is impossible. The loss in the 401(k) can only be made up through income and gains from the assets held in the 401(k). HECM proceeds are unrelated to whether there are losses or profits in a 401(k). So how can I tell you if “using the LOC for that purpose is different from using the funds for some other purpose?” If you are asking if coordinating the use of HECM proceeds with the net gains and losses in a 401(k) is wise, there is research which demonstrates that in many cases it will be.

    If one has a million in cash and the interest rate is zero, one still has a million dollars in cash. Is that cash rich or cash poor? Most of us would respond cash rich but it is a poor way to hold that amount in non-earning assets. Being house rich and cash poor is a subjective determination but generally having less than 2 years of cash on hand held in the form of liquid assets (where there is no HECM), is considered by leading CFPs as cash poor.

    Now you seem to switch subjects to the MMI Fund. If you are right about what you were told about HECM losses in the MMI Fund on the 2009 book of business, then those who are telling you such things do not know what they are talking about. The actuaries showed a profit of over $900 million for fiscal year 2009 in their fiscal year 2009 report. Look it up for yourself and read what the actuaries stated on Page 10 of their report on HECMs in the MMI Fund as of September 30, 2009 (be careful though there is also a report on the MMI Fund without HECMs for fiscal year 2009). That report is linked to the webpage at the following URL:


    Then on the same webpage open the actuarial report on HECMs for fiscal year 2010 and look at the information on Page 13. Perhaps you will come away with questions about why HUD took funds from other FHA programs of $1.748 billion and placed them into the HECM portion of the MMI Fund.

    From there go on to the budget fight in fiscal 2009 regarding the fiscal year 2010 budget. Here for the first time the OMB came out and disagreed about the subsidy HUD would need for the HECM program. Read the story and comments at:


    and again at:


    After reading the foregoing and comments to the RMD articles, we can come back and discuss if $798 million in losses projected for just the new HECM business that was expected to be generated during just fiscal 2010 was large or small. Remember at that time, all HECMs endorsed between fiscal year 1989 and 2009 were being ignored by OMB in making the $798 million estimate. Again OMB was just looking at one year’s worth of HECMs.

    After getting your mind around the references given above, please respond and let’s see if your remaining questions and responses have changed.

    • Martin,

      The response above is intended for you specifically. Sorry, I forgot to address to you!

  14. Cynic… THANK YOU for that direction on how I can find the relevant data on the program, I very much appreciate it and I’ll start going through it today and get back to you for further discussion.

    As to the LOC being used to reduce losses in a 401(k) or IRA… let’s say that you have $1 million in your retirement account and it’s invested in Vanguard’s no-load S&P 500 Index Fund and your plan is to withdraw four percent a year, or $40,000, to supplement your retirement income.

    So, the first year the S&P goes up by eight percent… you withdraw your four percent and your account still grew by four percent (minus miscellaneous fund management fees.)

    The following year, however, the S&P has a down year, and it drops by 10 percent, but you still have to withdraw the four percent you need to take as income.

    So, now your loss for that year is 14 percent, plus the fund’s fees, which means your balance dropped by roughly $140,000 instead of just $100,000, right?

    Well, if you had a HECM LOC, you could have chosen to withdraw the $40,000 you need for income from that credit line, instead of taking it from your 401(k) that year… by doing that, your losses that year would only be the 10 percent… as opposed to 14 percent.

    The HECM LOC is therefore used so as to not exacerbate market losses incurred in a down year. When the S&P goes up for the year, you take the money from your retirement account, when it drops you pull the funds from your LOC.

    Running what are called Monte Carlo scenarios to see how effective this strategy can be based on actual returns shows that by using the HECM LOC as a source of funds during down years in the market… you can expect to extend the life of your portfolio by 10-14 years.

    There’s more I could add to this discussion, but for now, that’s why it’s important for some retirees to use the HECM LOC… it increases the likelihood of them not running out of money before reaching their life expectancy.

    And I don’t understand why AARP seems to feel that use of the LOC for that purpose is putting the insurance fund at greater risk than were the LOC used for some other purpose.

    Thanks for your help and I’m looking forward to our continued discussions, as you are very helpful in terms of your knowledge and willingness to serve as a devil’s advocate.

    • Martin,

      I am very familiar with the so called use of HECM proceeds to reduce the risk on the sequence of portfolio returns. While this method works when LIBOR index interest rates are relatively low and stable, it is less effective when LIBOR index interest rates are relatively high and rising for any sustained period of time (such as a decade) at the time of origination.

      Obviously when expected interest rates rise above the principal limit floor, principal limit factors begin falling like a rock. Above 8% and principal limits are every low and using HECMs to reduce recognizing losses from the sequence of returns becomes far less effective as the cost of using HECM proceeds rises and the line of credit is quickly depleted due to a high expected interest rate at HECM origination. In such times, the last resort strategy can become effective.

      As to the reasons why AARP has taken its position I have no access to that information. I just know that when it comes to describing the growth rate AARP so far has not described it correctly in their writings which makes me wonder do they know what they are talking about. At one time AARP basically ran counseling. Those involved were very knowledgeable about how the growth rate is computed.

      Here is what AARP stated: “The growth rate consists of the interest rate, plus the mortgage insurance premium, plus a fixed margin
      charged by the lender that is specified at loan origination.”

      Here is what is wrong with the quotation. First the so called growth rate is one twelfth of the SUM of two variable rates. The reason for stating that it is one-twelfth of anything is that it is applied monthly. So all annual rates must be adjusted to their monthly rate as HUD makes clear in its Handbook on HECMs. The only variable rates used in the computation are the note interest rate for the month and the annual rate for ongoing MIP (1.25% for HECMs with case number assignments after 10/4/2010). This is exactly the same rate applied to the balance due each month when there has been no other activity (that is payouts to or for borrowers or payments received from borrowers) to the balance due.

      AARP saying there are three variables and again they do not take one twelfth of their sum. First they say it is the interest rate (but do not specify which one), then the mortgage insurance premium (but not its annual rate), and finally a lender’s fixed margin. As you can see there are problems with the first two AARP items but it is the third that is the worst. They have the margin in their growth rate twice. All interest rates relevant to a HECM consist of the lender’s margin plus some interest rate index. So if it is already in the interest rate why are they listing it again as a separate item? You will find the quotation in the AARP Public Policy on Reverse Mortgages at:


      So I hope that helps. AND I am not a devil’s advocate. You see when it comes to things like non-recourse coming from FHA insurance, then if the lender does something wrong so that HUD rejects the claim for reimbursement or lowers the amount requested in any way, is the borrower responsible for the amount not reimbursed? Your reply has to be yes but mine is NO because the mortgage documents preclude the lender from seeking a deficiency judgment in the courts. Also there are reverse mortgages that are not insured by FHA (for example today’s so called jumbo reverse mortgages) yet they are all non-recourse. Why? Because all reverse mortgages including HECMs must be non-recourse by federal law. Most lenders put that stipulation into their loan documents (and FHA incorporates that language into the model mortgage documents that lenders must use for HECMs). I am just making the case based on facts not on how much easier it is for seniors to understand why they are paying for the MIP that protects the lenders.

  15. Thanks Cynic… you are beyond helpful and wonderful to have around. Email me sometime and i’ll buy lunch!

    • Martin,

      Thank you for your response.

  16. A lot of negative comments below. The reverse mortgage program has saved my parents retirement.

    The bank owns the home
    Heirs won’t inherit anything

    We found comparison website, click quote save dot com, that found us a lender who charged $0 upfront fees (savings of $6k).
    There was no haggling involved just tell them you don’t want to pay any upfront fees.
    The title/ownership remains in my parents name and if home values increase I will inherit the remainder of the equity.

    My parents are saving $24k/yr by not having a mortgage payment, and I don’t have to worry about their financial situation. They don’t need my assistance, everyone wins.

    If home values decreases or they live for another 30 years I’m perfectly happy not inheriting any $ or the home. I just wanted them to have a comfortable retirement.

    Don’t believe all the negative comments without doing your research first. Like any other service and industry there are good lenders out there.

    Thank you all, and best of luck.

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