Federal Reserve Reports on Expansion of Reverse Mortgage Market

A new report published by the Federal Reserve Board looks at the reverse mortgage industry and examines loan level data (from 1989-2007) to provide insight into the growth of the program.  Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market is the first paper to perform such analyses using actual loan-level reverse mortgage data says the Federal Reverse.

The reports author, Hui Shan writes that today’s reverse mortgage borrowers are younger than earlier borrowers at the time of origination.  Included in the report is a graph showing the age of recent borrowers which, “suggests that there may be homeowners younger than age 62 who would want to purchase reverse mortgages if allowed.”

Data used in the report also found that borrowers who take the line of credit payment plan, single male borrowers, and borrowers with higher housing values exit their homes sooner than other reverse mortgage borrowers.

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One of the most common complaints about reverse mortgages are the upfront fees involved and how many believe that these loans are a bad deal for elderly homeowners.  Shan explains that the upfront costs are necessary because “because there is little risk-pooling in the HECM program, insurance premiums have to be high for HUD to break even.” 

As a result, HUD may have to change the fundamental structure of the HECM program in order to cut the costs significantly. 

Later in the report Shan writes about the misconception that the tenure payment plan for a reverse mortgage is equivalent to an annuity.  “For immediate life annuities, insurance against outliving one’s assets is provided by pooling mortality risks across a group of people,” says Shan.  However, the tenure plan of a HECM, involves little risk pooling. 

For example, if a borrower dies shortly after the HECM loan is originated, they pay back only the loan balance which is presumably small.  HUD does not inherit the borrowers entire housing equity to pay another borrower who lives to be over 100 years old.    

Thus, the longevity insurance aspect of a tenure HECM loan is very limited. In addition, the data showed that only 10% of HECM borrowers choose the tenure payment plan or the modified tenure payment plan, which suggests that the annuity aspect of reverse mortgages is irrelevant to most borrowers.

Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market

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  • As much as I understand the “little risk pooling” concept and how it relates to the higher premiums “needed” for HUD, I ask myself: “What are the percentages of seniors that pass away shortly after they get a HECM vs. the ones that don’t?”
    Not to mention even if one of the homeowner’s dies, the monthly .05% MIP fee is still being added to the “pool”. Add that with all the upfront MIP fees and tens of thousands of fees added monthly from the .05% MIP and this “pool” seems like it would be getting pretty large. Am I missing something?

  • The Tenure Reverse Mortgage FHA(HECM) offers a very comforting
    un interruptible support for Seniors with short or shrinking monthly income.

    The Credit Line can offer similar support, if one has the discipline to
    draw only the needed funds to cover the shortfall in budget.

    Annuities must be carefully considered . Candid discussion with family
    members has much to recommend it.
    Bob LaFay,Reverse Mortgage Consultant

  • From p22,

    “Under the FHA insurance program, borrowers pay 2% of the MCA as the upfront
    mortgage insurance premium regardless of what payment plan they choose. The estimation
    results shown above suggest that line-of-credit loans impose consistently and significantly
    higher risks of financial losses on HUD. As a result, there exists cross-subsidization from
    reverse mortgage borrowers who choose term or tenure payment plans to those who choose
    the line-of-credit payment plan. Given that an increasing proportion of HECM borrowers
    chooses the line-of-credit payment plan in recent years, increasing the monthly ongoing
    mortgage insurance premium while lowering the upfront premium will reduce total upfront
    costs of reverse mortgage loans and decrease the risk of financial losses for HUD.”

    To me this sounds like a tenure only product alternative would be less risky for HUD.

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