In a review of the work done by the Federal Housing Administration (FHA), the government “watchdog” Government Accountability Office (GAO) released a recent report outlining some of the challenges facing FHA’s reverse mortgage program.
In its report, GAO found that falling home prices were a main driver of the agency’s negative economic position of $2.8 billion at the end of 2012, but there were additional concerns about longevity risk and tax and insurance defaults due to borrower funds drawn upfront.
In its November 2012 annual report to Congress on its Mutual Mortgage Insurance Fund, FHA identified a number of challenges facing its Home Equity Conversion Mortgage (HECM) program.
At the forefront was the large majority of borrowers maximizing the upfront draw under the HECM Standard fixed-rate product.
The vast majority of recent borrowers took out 80% or more of the maximum amount possible in one initial cash draw, GAO reports in response.
Researched performed by independent actuaries indicate that HECM loans with high upfront draws are twice as likely to have tax and insurance (T&I) default than loans with initial draws of 60%. Additionally, these loans were also found to be four times as likely to default than those with initial draws of 40%.
T&I defaults stemmed largely from homeowners withdrawing all eligible cash upfront, resulting in insufficient cash flow in later years to maintain property upkeep, taxes and insurance payments—incidences of which have increased in recent years, GAO notes.
Another challenge for FHA was increased property conveyance rates, termination upon which increased sharply during this past year,
GAO research indicates that this was directly related to falling home prices, as owners and estate executors were faced with mortgage balances greater than property value at the time of borrower exit from the home.
Because of this, owners and executors were less willing to market and sell the property than those with positive equity in the home.
In such cases, GAO notes that there is no financial benefit from managing property sale and so those responsible for the home are more likely to convey the property to HUD for sale.
Property management and marketing costs tied to these homes conveyed to HUD cost approximately 12% of property value, thus increasing the severity of loss for FHA.
Slower borrow mortality and termination speeds have also increased the likelihood that loan balances will exceed property values at the time of loan terminations, according to the report.
Since January 2013, FHA has made and proposed changes to its HECM program to address some of these challenges, most notably by halting the use of its Fixed-rate Standard HECM product.
Additionally, FHA proposed other changes to Congress, including reducing the amount borrowers can draw at the time of loan origination, as well as issuing new incentives for estate executors of HECM borrowers to dispose of properties themselves rather than conveying them to HUD.
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