The current economic crisis and burst of the housing bubble has had a significant impact on the reverse mortgage guarantee provided by HUD on HECM loans according to an article by Jonathan Glowacki and Mike Jacobson of Milliman on Friday at Mortgage News Daily.
The extremely technical article on the economic basis for the future of the HECM program explores three scenarios. In the first, home prices experience a one-time decline of 30% after which they appreciate at 4%. In the second, home prices experience a one-time decline of 45% followed by an appreciation of 2%, following a model similar to that which occurring in the Japanese economy from the 1990s through 2009. In the last, the two scenarios are averaged.
For the purpose of the study, calculations were made using a 75 year-old borrower with a $100,000 initial home value and an expected interest rate of 6%. The study was also interested in whether the reduction in principal limits could help the program return to its zero-subsidy self-funding status.
While no scenario painted a rosy picture, a 4% appreciation rate in home values after the crisis as accounted for by the yearly assumed appreciation of home value already built in to the HECM program is less dire than the scenario where the appreciation rate is 2%. Still, Glowacki and Jacobson’s study shows that all HECM loans have been effected by the housing crisis, even those going back as far as the program’s inception in 1989. As such, the authors are concerned and unsure if the HECM program will be able to withstand the pressures of the deteriorating economy—especially in its current state.
Write to Reva Minkoff