Curbing HUD losses on HECM reverse mortgages
The HECM reverse mortgage program has been bleeding red ink. Losses on transactions in which the loan balance at termination exceeds the net recoverable property value have been larger than the insurance premiums FHA collects from all HECM borrowers. According to news reports, the new FHA commissioner, Brian Montgomery, is considering measures that would reduce the amounts seniors could draw on reverse mortgages. Smaller draws would result in slower growth in loan balances and, all things being the same, in reduced losses to FHA.
Other things are not the same, however. Reduced draw amounts would make the program less attractive to potential new borrowers, especially to the type of borrowers needed to make the program self-sustaining. FHA needs to take another look at what needs to be done.
Adverse selection is the bane of insurers and FHA is no exception. HECM borrowers are not a cross-section of senior homeowners. A large proportion of HECM borrowers are financially desperate; a HECM is their last resort and they draw the maximum amounts permitted. Equity retention is not an objective, and they are not scrupulous in maintaining their property.
In contrast to the "desperates," there is a much larger group whose lives could be enriched by a HECM, for which purpose they would not necessarily need to draw the maximum amounts permitted. If they did take a HECM, many would retain some equity for their heirs, an objective that protects FHA against loss. For these "solid seniors," the HECM is optional but very few exercise the option. HUD's objective should be to attract more of them.
I have three suggestions for accomplishing this, listed below in order of complexity: the first two are considered in this article, the third in a forthcoming article.
• Provide a basic HECM education function on HECM draw potential.
• Encourage conversion of the existing dysfunctional HECM market into a shoppers market by certifying HECM multi-lender networks (MLNs).
• Encourage integration of the HECM into retirement strategies.
Basic education on HECM draw potential: This is directed to the large group of senior homeowners who could profit from a HECM reverse mortgage but under existing circumstances are not motivated to pursue it. They might pursue it if information about how a HECM might help them was readily available from a highly visible and completely trustworthy source. That source could be HUD's website.
I have already done the work for HUD. My site contains a series of tables on HECM draw amounts of different types, which are updated whenever HECM prices change. The tables are directed at four major ways that a HECM reverse mortgage can help seniors:
Table 1 is directed at those who are still making payments on a standard mortgage, showing how large a balance they can pay off with a HECM reverse mortgage.
Table 2 is directed at those who need to supplement their income, showing the monthly payment they can draw for as long as they live in their home, or for shorter periods.
Table 3 is directed at those who want to prepare themselves for future contingencies or opportunities, showing the credit line available to them at closing, after 12 months, and after 10 years.
Table 4 is directed at those who want to buy a house without incurring a monthly payment, showing the amount they can draw for that purpose from a HECM, and the amount required from other sources.
I would be happy to place these tables on the HUD site, and support them without charge.
Convert the HECM market Into a shoppers market by Certifying MLNs: The existing market for HECMs can best be described as a "gotcha" market in which distrust is a major by-product. The objective of HECM loan providers is to attract potential borrowers into making contact, then collecting the information needed to entangle them in a process that encourages them to take a HECM but discourages them from looking elsewhere. Prices are disclosed only after a senior discloses the property address, her email address and in some cases her Social Security number. As a result, very few prospective HECM borrowers contact more than one lender.
A HECM MLN is an independent entity that will help seniors make the best decision among HECM options, and obtain the best deal offered by multiple lenders on that option, at a single source. Seniors select the lender they want to deal with from among those participating in the MLN, based on information provided by the MLN. MLNs would replace the gotcha market with a shoppers market.
MLNs would be certified as providing the following functions:
The MLN should maintain a relationship with enough lenders that it can offer at least three independent price quotes in every state. This can be done with three national lenders that operate in every state, or with a larger number of lenders that have limited geographical coverage.
The MLN should provide an easy-to-use tool that allows a senior with no prior HECM knowledge to define the HECM draw option or options they want. The tool must allow the senior to try out different combinations of draw options to find the preferred combination.
The MLN should provide data on the particular metrics that are relevant to each senior's selection of a lender. The required metrics are:
• Maximum cash draw at closing.
• Maximum sum of cash draw at closing and after 12 months.
• Maximum initial credit line.
• Maximum credit line after X-number of years, where the borrower determines X.
• Maximum monthly payment for as long as the borrower resides in the house.
• Maximum monthly payment over Y-number of years where the borrower selects Y.
• Minimum debt after Z-number of years where the borrower sets Z.
Back in the 90s, HUD toyed with the concept of a Computerized Loan Origination network, or CLO, in connection with standard mortgages. Nothing ever came of it, perhaps because the need was less than compelling. I changed the name from CLO to MLN because HECMs are very different, and the need for what a network can provide is more than compelling.
• Contact Jack Guttentag via his website at mtgprofessor.com.