Reportedly in need of an $800 million credit subsidiary to cover losses caused by declining house prices, the HECM program faces a related challenge stemming from REOs, or real-estate-owned properties, that have fallen (back) into HUD’s lap. As Sally Bene’, program director, Servicing Division, HUD’s National Servicing Center, Tulsa, Okla., notes: “In the reverse world, every loan is assignable at 98 LTV, but there are strict criteria for assignment that must be met, it’s not an automatic transfer at 98 percent. But if the loan is in default,” Bene’ explains, “that REO property can be marketed.”
Lenders also will start turning homes over to the FHA if the outstanding balance on the loan exceeds a home’s value. That would increase the agency’s exposure to real estate-owned properties at a time of swelling inventories.
At base, the problem is declining property values. By early spring of this year, there had been a 31 percent drop in housing prices across the country, from a valuation peak reached in the second quarter of 2006, according to the S&P/Case-Shiller U.S. National Home Price Index. Nationally, home prices are at levels similar to the third quarter of 2003.
The hardest hit neighborhoods are in the interior of California, where prices have plummeted as much as 70 percent. Conversely, the areas weathering the storm best are upstate New York, Pittsburgh, Texas and Charlotte, N.C. – in some cases, because there was little or no price speculation and in others (e.g. the “Oil Patch”) because employment levels remained relatively steady.
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]