A rumor in the marketplace is that the current level of problem delinquencies range between 2% and 3%. Three things that are not reflected in these percentages: 1) most of the delinquencies relate to variable rate HECMs; 2) delinquencies seem to get worse when homes go under water; and 3) there is more danger with fixed rate HECMs than variable.

With variable rate HECMs, a large portion of those loans have available lines of credit; thus if the borrowers on these HECMs do not pay such costs, service providers can invade the lines of credit to pay them. This is not the case with any fixed rate HECMs. Thus all delinquencies (unless this was an oversight by the borrower) related to fixed rate HECMs are difficult problems.

New View Advisors, LLC got it right when they discussed the problem of rising delinquencies as more homes go under water. This will clearly become a larger and larger problem with time.

Then finally, current experience with delinquencies is based on primarily variable rate HECMs. So one would expect delinquent real estate and insurance payment problems to increase where there is no available line of credit (fixed rate HECMs). As the cohort of HECMs endorsed during fiscal years 2008 and 2009 season, we should begin to see higher percentages of HECMs that have these problems.

Could it grow to 10% of all HECMs? No one knows. All we really can reasonably estimate is that if the 2%-3% rate is reasonably correct now and actual home appreciation rates remain low, these percentages will rise to some multiple of those percentages over the next seven years. The industry needs to find ways to deal with this potential growing problem.