Loss of Equity Drives Reverse Mortgage Budget Shortfall

A feature story in the upcoming June issue of Mortgage Banking Magazine will report a 31 percent drop in nationwide housing prices since values peaked in the second quarter of 2006. The hardest hit neighborhoods are found in the interior of California, where prices have plummeted as much as 70 percent.

The story reports that while the country can expect, at most, a 3 percent upswing in prices for next year, some “sand state” markets will continue to experience a valuation slide. In the Miami market, for example, prices will drop another 24 percent in the next 12 months.

Against this negative equity backdrop comes earlier word from the FHA that the HECM program is expected to face a $798 million budget shortfall in FY2010, directly related to the aforementioned decline in house prices. Consequently, HUD has petitioned Congress for almost $800 million for the HECM program, the first such subsidy request since it was established in 1990.


“I knew it was only a matter of time,” says Joseph Kelly, partner, New View Advisors, of the deficiency. He advocates a “low-LTV option” for reverse mortgages “that [would] result in lower losses and lower costs.” Kelly proposes a HECM with a “lower LTV option [that would] eliminate an upfront MIP [mortgage insurance premium] and tap into a whole new market of seniors who maybe don’t need the maximum amount and are cost conscious. Make it a 60 percent LTV,” he suggests, “instead of 80 LTV,” a sort of “HECM2 option,” according to Kelly, a former Lehman Bros. executive.

Meanwhile, Jeff Lewis, senior managing director, Guggenheim Partners, expresses some doubt about the HECM shortfall. “By my calculations the program takes in $1.5 billion to $2 billion in revenue in 2010 [so] that [$798 million] loss is literally impossible.” Especially, adds Lewis, “if you look at how small the universe of outstanding loans that could be maturing is.”

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade, currently specializing in the reverse mortgage sector. He can be reached at [email protected]

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  • While I hope for the industry sake that Jeff Lewis’s calculations are more correct. I think it is an outstanding idea to introduce a “HECM2” concept. It is a much needed product would help many seniors who need smaller amounts or who otherwise would not consider a RM due to the upfront MIP. TERRIFIC

  • Does anyone else think it’s absurd that the FHA has collected (and continues to collect) MIP on each and every HECM from every single borrower and then asks taxpayers to make up a predicted shortfall? My understanding is that the money collected from MIP was spent by the FHA in other areas rather than being held to cover potential losses under the reverse mortgage program. That is government run amuck.

  • MIP is 2% of the original appraised value, then charged incrementally every month to each homeowner, then theoretically invested at interest to cover future shortfalls. Where are the statistics to 1) show their escrow balance from the MIP account, 2) the interest earned/credited on the fund(s), 3) the debits and credits for claims?….. My concern is that by asking for $800 million now, FHA will be ordered to raise MIP rates which are already debilitating.

    BTW, If the average loss was $100,000 that would mean nearly 8,000 homes went belly up? In a program that probably doesn’t have a million homes?

  • It seems to me that they are using the “fuzzy math” again….unless, they expect many more homes to be short funds and they want to be ready.

    But I think Tom is correct to expect an increase in MIP on top of a already high MIP cost.

  • I think the industry needs to pull together and demand a full accounting for the HECEM MIP.If it is being used for anything other than a loss reserve, that surely is “Gov. run Amuck”.

    Dick Allen

  • I too think the government must be using “fuzzy math”. I think that HUD over the years should have accumulated a large escrow fund for these times.

    The reverse mortgage industry needs to pressure HUD and Congress to not use the MIP funds for other programs, if that is what they are doing. It is outrageous that senior homeowners who do a HECM have their MIP dollars spent on other programs. If we had a true accounting of the MIP fund I’m sure it could be argued that the MIP rate could be reduced. We then would have a much better RM product for our senior homeowners.

  • The truth is the MIP premiums (upfront and monthly) flow into the general US Treasury and are spent immediately by the federal government. Same with Social Security and other programs. The social security trust fund is made up of government IOU’s. I imagine the same is true with the FHA excess income.

  • Misappropriation. That is the only word that needs to be used. Same as Social Security and anything else the government gets their hands on. There are definitely losses on some of the outstanding loans…but please. I’ll leave it at that.

  • Talk to accountants and many financial advisors, and they will say “RMs are to costly”. Talk to them about a new product with lower costs and they will like and recommend HECM Lite for appropriate situations. It would be a screw driver for smaller jobs compared to the expensive hammer that the “original” HECM is.

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