Roughly 93,000 HECM loans, or 17.2% of the Federal Housing Administration’s reverse mortgage loans outstanding, are underwater by $3.3 billion total, according to analysis released today from New York, N.Y.-based New View Advisors.
The estimate is based on recent data from Department of Housing and Urban Development, which includes all HECM loans originated through January 2011.
The $3.3 billion figure compares loan balance to property value, New View explains, but does not account for property disposition cost. More accurately reflecting the situation, New View offers scenarios factoring in 10% and 15% haircut amounts, leading to estimates of 135,000 loans (24.9% outstanding) underwater by $4.9 billion and 166,000 loans (30.6% outstanding) underwater by $6.1 billion, respectively.
“HECM loans originated from 2005 through 2008 comprise substantially all of these underwater loans. In the 10% haircut scenario, they account for 91% of the underwater loans,” New View’s analysis says. “The 2006 and 2007 vintages are the worst offenders: each accounts for about 30% of the problem loans.”
The total underwater proportion of HECM loans at estimates between 17.2% and 30.6% compares with a recent report from CoreLogic, which estimates 23.1% of all forward mortgages are underwater.
The numbers will get worse before they get better, New View predicts. During the time over which the loans will pay off, growing loan balances and borrower advances, especially if combined with slow prepayments and a down housing market, will make the underwater problem worse, the analysis says. The underwater estimates represent how much FHA would lose if the loans paid off immediately, rather than over the next few years.
New View estimates the total value of outstanding HECM loans through January 2011 to be approximately $76 billion, and that about $7.3 billion negative net present value for the program since its inception, with the vast majority of the damage coming from the 2005-2008 HECM loan cohorts.
“If there is good news in all this,” New View says, “it is that the reverse mortgage industry has already undergone the painful process of reform, including reducing loan-to-value ratios (principal limits) and weaning itself off Fannie Mae….FHA’s FY 2012 budget predicts a modest surplus from newly originated HECM loans; this is a plausible estimate reflecting a more conservative HECM program.”
View the report from New View Advisors.
Written by Elizabeth Ecker