The US Government Accountability Office released a new report which found that reverse mortgage policy changes from the Housing and Economic Recovery Act have had mostly positive effects on lenders and borrowers. However, recent market changes and developments have increased HUD’s risk.
In order to examine how the HERA changes affected lenders and borrowers, the GAO surveyed a representative sample of HECM lenders, analyzed loan-level HECM data, and reviewed HUD estimates and analysis of HECM program costs.
Overall, the GAO found that current economic conditions have had a moderate upward influence on lenders’ plans but secondary market conditions have had a downward influence on about one-third of lenders’ plans to start or continue offering HECMs.
Some industry participants that the GAO interviewed stated that the changes were a good compromise that benefited borrowers by limiting the origination fee and increasing the loan limit. Additionally, officials at NRMLA and MBA said the changes benefited lenders by making the product more attractive to individuals with higher-value homes.
The report also addresses the Fannie Mae pricing changes and estimates that approximately 90 percent of lenders viewed secondary market pricing requirements and the transition to live pricing as important factors in recent margin rate increases on HECMs.
Fannie officials explained that as the price they pay lenders for HECMs falls, the margin rate the lenders charge the consumers generally increases. Some lenders we surveyed noted that margin rate increases stemming from pricing changes could make HECMs less attractive to borrowers because they would not be able to obtain as much cash from their HECM.
Some lenders noted that live pricing complicates their relationship with borrowers because the interest rate can change between loan application and closing, which may result in the senior being able to receive less money from their HECM than originally quoted.
Ginnie Mae is discussed as an alternative to Fannie Mae but because of certain provisions, lenders are exposed to extra risk on the loans as compared to selling HECMs to Fannie Mae.
Ginnie Mae requires HMBS issuers to buy back the HECM when the loan balance reaches 98 percent of the loan’s maximum claim amount.15 Second, issuers are required to pay interest shortfalls to investors when the loan is terminated mid-month.
The GAO found that in recent years there has been a rapid increase in the number of lenders participating in the HECM program. However, the bulk of HECM business is concentrated among a relatively small percentage of lenders. In fiscal year 2008, roughly 80 percent of all HECMs were originated by fewer than 300 lenders, or about 10 percent of HECM lenders says the report.