Calculating Reverse Mortgage Risk, Are There Other Options?

Not unlike an insurance policy, wherein key educated guesses underpin much of the pricing and risk (payout) calculations, a reverse mortgage “calculator” is used by lenders to determine how much money to make available to a senior from the equity in their home, based on several factors including a borrower’s age and the property value.

But, there are differing opinions on the features used by the calculator to derive its findings. Mike Fasano of Fasano Associates, a Washington, D.C. firm which specializes in life, health and annuity underwriting, finds it “striking that AARP’s reverse mortgage calculator doesn’t give more money to someone who is single versus a married couple.” And, he wonders whether “it would make sense, as the reverse mortgage industry goes after Baby Boomers, to consider medical underwriting as a differentiating factor in products. I would think it would make an awful lot of sense,” Fasano opined.

A HUD economist who helped set-up the financial model for reverse mortgages, tells RMD that, “medical underwriting could be considered on a longer-run agenda, but it would need development work. The difficulties with doing that include the fact that lenders are not prepared.”


Bronwyn Belling, national program coordinator, AARP Foundation – Revere Mortgage Education Project, says: “HUD chose to design the [reverse mortgage] program so that the loan amount is based on the age of the youngest borrower. The older spouse doesn’t matter,” she explains, because “the younger [one] has the likelihood of living longer,” although she admits “it’s one household where either person can outlive the other.” Belling recalls Fannie Mae’s Homekeeper program – terminated at the end of 2008 – which did take into account the joint life expectancy of both borrowers [using an] actuarial table.

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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  • Answers to the first question can be found in the 1990 report titled “FHA Home Equity Conversion Mortgage Insurance Demonstration: A model to calculate borrower payment and insurance risk” by Edward J. Szymanoski.

    The answer to why the age of the youngest borrower is used is textually quoted from the report page 46:

    “The HECM payment model uses the female general population mortality table for all borrowers, including co-borrowers. The reasons are as follows. The majority of borrowers are expected to consist of single females (Based on a 1988 study by Wienrobe: 63% single females,12% single males and 25% married couples of participation in reverse mortgages). Couples should be the next largest group, followed by single males. The potential understimation of life expectancy for couples will be offset at least partially in two ways. The first is that single male borrowers have life expectancies three or four years less than that of females of the same age, which is approximately equal to the understimation for a couple. The second is that some couples are likely to move out at an accelerated rate after the death of one spouse, resulting in reductions in loan survival probabilities. The combination of the two effects, along with the expected dominance of single females as borrowers justifies the use of the single mortality table for all borrowers.The benefit of simplicity in not having to develop separate principal limit factors for co-borrowers of various age combinations was also considered making this decision.”

    I guess the better question here is: Should HUD review the data and determine if the assumptions made have held up?

    As for medical underwriting, the answer was given by Edward J. Szymanoski in his 1994 paper titled “Risk and the Home Equity Conversion Mortgage” published in the Journal of the American Real Estate and Urban Economics Association and again I textually quote:

    ” Like life insurance, reverse mortgage lending under HUD’s HECM program assesses risk on small age intervals. Unlike life insurance, however, medical underwriting of HECM is not authorized by the statute, it is probably not necessary. The reason is that the HECM program removes some of the advantages to the individual holding asymmetric information on longevity.”

    Here the term asymmetric information must be explained as it relates to “adverse selection” and longevity risk. Adverse selection is described according to Szymanoski as a situation where if an individual perceives his or her risk to be greater or (lower) than average for a group, then this individual is more likely (less likely)to buy insurance than others in the group. Asymmetric information is described as when members of a group have more information to assess their risk than the insurer. When asymmetric information is present then adverse selection is possible. In this case the insurer cannot charge the riskier members a higher premium because the insurer cannot always determine which member of a group poses the greatest risk.

    Bottom line on medical underwriting:a change in law will be required to authorize it.

    Hope the explanaition clarifies some of the questions.

  • Mr. Torres,

    When applied to financial matters, all mathematical models are significantly impaired and flawed due to the underlying assumptions. However, some models are much better and more reliable than others.

    It is good that you are moving away from your previous hard line position about the HECM assumptions and are at least willing to accept the fact they may need to be reviewed. Bravo!!!

    It seems HUD is formally moving away from blindly following its own model which is good for the program. At a minimum, the model needed significant tweaking.

    My concern is not about FY 2010 and beyond but rather those HECMs endorsed in the last five years. Based on 1) the expected tepid turn in the housing market over the next five or so years, 2) informed and rational borrower behavior when credit lines have available proceeds in the types of markets where the HECMs were concentrated in those years, and 3) the relatively small “true” (i.e., for those HECMs that have actually terminated) surpluses in the HECM program available for offset, anticipated losses in the outstanding HECM pool seem destined for some federal subsidy. Since we are near the termination of many of these HECMs, a study on the estimated overall surplus or deficit in the HECM program as if it terminated today — using the housing trend information that was used in making the FY 2010 budget calculation — would be useful.

  • Good points above, with respect to the major variables excluded from current HECM LTV tables: sex, joint survival and medical underwriting. All of these could relatively quickly be included from a product pricing standpoint given the significant history/experience in life insurance actuarial tables for all of these. Of course, the operational execution of these would take much longer, since it would require very significant changes to the marketing/sales/underwriting processes in the industry. All that said, I very much agree with Critic that we need much higher volume to make any of this really relevant and worthwhile to the industry.

    The point that I would add is simply to look at the valuation of reverse mortgage assets after funding on the secondary market and note that these factors (with the exception of medical underwriting) are already included in valuations. We do quite a bit of work in valuing these assets and investors are absolutely looking at borrower sex and single vs. joint survivability to better understand expected loan term and termination rates.

  • FHA mortgage insurance should never be based on the medical condition of the borrowers unless HUD is willing to make it a condition for all FHA loans. Let’s hope that medical underwriting of a HECM never becomes a reality. Talk about age discrimination!

  • Mr. Veale,

    Wow, I got a compliment from you!! Thank you very much!!
    I would not qualify my stance or yours for that matter, on previous discussions, as “hardline”. We simply had different points of views. I do agree with you that new studies about the HECM program should be made to either validate assumptions or improve the program. HUD had been doing that until 2003 or 2004.I think it is time to have another round of reviews. There are other assumptions about the HECM program that have not been discussed and yet a little validation would be nice to have.

    Mr. Lunde,

    It is interesting to see how in the secondary market, the rating agencies (both Moodie and S&P) do account for those factors except medical underwriting as you do point out. In the financial sense, the factors and associated risks mentioned in the article are already built into the ratings of these products which tells me that at least there is awareness and intrinsic protection for investors for these type of intruments.

  • Lawyers, politicians, TV news readers, and now insurance agents. Everyone thinks they are an expert on Reverse Mortgages, but few know what they are talking about.

    People who have high medical expenses are among the ones who need a Reverse Mortgage the most. Are they going to be denied a Reverse Mortgage or receive less, like insurance applicants who flunk the medical underwriting test?

    Let the insurance sales people take care of their business and we will take care of ours.

  • Just a intuitive observation from a NON-RM expert. Mortality and morbidity rates are probably higher for RM borrowers. Hence using insurance company actuarial figures would be problematical. The RM industry would have to develop its own rates and that may be premature. Obviously dying with an RM is pretty clear cut, but higher morbidity rates would probably mean more incidences requiring out of home extended care and the possibly resulting in a one-year and you are out trigger.
    Thus, reluctantly, I am forced to partially agree with The Critic, this might make a product to complicated and muddy the waters.

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