A lack of alternatives and positive benefits to society are to of several supporting factors for the government’s involvement in the reverse mortgage market, writes “Mortgage Professor” Jack Guttentag in a column this week.
In response to the question of whether the government should be involved, Guttentag cites five reasons for the government’s interest in the Home Equity Conversion Mortgage program.
First, that there is virtually no private market for reverse mortgages, as a result of the economic downturn. Without a substitute, the government’s stake in the program should stand as a means for older homeowners to remain in their homes, he writes.
Additionally, Guttentag notes the positive benefits to society of the reverse mortgage program.
“The HECM program generates what economists term “positive externalities”, which are benefits to society that are not enjoyed by the private firms involved in the activity,” he writes. “By providing a facility for converting illiquid housing wealth into spendable funds, the program reduces the burden on public services of various types that are directed toward seniors in need.”
Other benefits of the program include the ability for homeowners to live off of their assets rather than to risk outliving them, by offering a line of credit that can be used in place of selling off investments. Further, Guttentag stresses the need of the HECM program to serve as a model for other private programs to emerge in the reverse mortgage market. Finally, he urges that the program is self sustaining and should be continued.
“Some would dispute this because a recent actuarial review of the financial status of FHA’s HECM insurance fund showed a deficit,” Guttentag writes. “However, estimates of fund value swing around from one year to the next based on forecasts of property values and interest rates, the volume of future business, and changes in program rules. The recent elimination of the standard fixed-rate program, for example, has eliminated the segment of the HECM market that has resulted in the largest losses.”
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