Mortgage Prof: Eliminating Fixed Rate Standard HECM “Makes No Sense”

Prior to an announcement by the Federal Housing Administration stating a moratorium will go into effect for its fixed rate standard reverse mortgage program, The Mortgage Professor, or Jack Guttentag, responded to the expected change in a column this week.

Doing away with the fixed rate standard product, he says, makes “no sense,” for the FHA’s purposes of shoring up its insurance fund problems.

The Mortgage Professor writes:

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“Eliminating the fixed-rate standard HECM would not eliminate the ability of seniors to use all of their HECM borrowing power to draw cash. They could continue to do this with the fixed-rate Saver, which is identical except that the maximum cash withdrawal on the Saver is somewhat smaller while the upfront mortgage insurance premium is largely eliminated.

Viewed strictly as a way to reduce FHA deficits, elimination of the fixed-rate standard while leaving the fixed-rate Saver makes no sense. If the first is a loser for FHA, so is the second. While the Saver loans are smaller and therefore expected losses are smaller, the insurance premiums on the Saver are correspondingly smaller. The only financial benefit to FHA would occur from seniors who, because the fixed-rate standard is no longer available, elect to drop out altogether.

I would not expect many dropouts because the options remaining are far more attractive than anything else available to financially strapped seniors. Borrowers looking for the maximum cash draw can switch not only into the fixed-rate Saver, but also into the adjustable-rate standard, which would allow them to draw more than on the fixed-rate Saver. I doubt that the risk of rising interest rates would offset the attraction of larger cash draws.

If every borrower looking for the maximum cash draw who is shut out of the standard fixed-rate HECM swings to either the Saver fixed-rate HECM or to the standard adjustable-rate HECM, the expected impact on FHA’s net income would be zero. Indeed, it could be even worse if — as seems very likely — cash-out adjustable-rate HECMs pose a greater risk of loss to FHA than cash-out fixed-rate HECMs.

Guttentag suggests instead a calculated approach to encourage less risky borrowers and discourage more risky borrowers from taking out reverse mortgages under the HECM program.

Read the full article on Inman News or on the Mortgage Professor’s website.

Written by Elizabeth Ecker

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  • sounds like a “what is or isn’t an assault weapon” argument you make. I for one am glad to see the fixed standard go the way of the do-do bird. A handful of lenders are going to have massive defaults in urban areas as a result of them and investors will find themselves owning the paper for own entire inner city neighborhoods.

  • Prof. Guttentag’s argument deserves the attention of HECM engineers at FHA, particularly his suggestion that FHA should reduce adverse (and increase favorable) selection.

    • Atare,

      Personally the recommendations of Dr. Guttentag seem odd and ill founded.

      What good are MIP Revenues when the balance due substantially exceeds the value of the home? For example, say HUD collected $57,000 in total revenues on a HECM but the loss is $158,000. If HUD had never collected any MIP, the loss would be $101,000 before considering earning on the MIP and additional accrued interest the MIP produced. Why not raise the MIP to $100,000, it will simply mean HUD will have to reimburse lenders more for accrued interest?

      So what good was the MIP to HUD in the case above? The only case where more MIP makes sense is when there will be some equity in the home at termination.

      With fixed rate Savers there is some chance that MIP will do some good but with fixed rate Standards there is much less of a possibility especially in periods when values are falling or growing slower than appreciation rate used in the HECM PLF calculations. By adding upfront MIP on fixed rate Savers, that product will become much less used meaning the ongoing MIP will not be available to HUD.

  • OK, let’s be creative and try to solve the reason why people default.
    Then, let’s do what we were commissioned to do — let the seniors have
    their own money in retirement.

    • wstrycker,

      OK???

      But only a very small amount of the losses which caused HUD to eliminate the fixed rate Standard had anything to do with defaults which come from not paying taxes, insurance, and other property charges.

      The losses which have created the concern are those which are estimated will arise when the HECMs endorsed between October 1, 2008 and September 30, 2012 terminate net of all related MIP generated from those HECMs discounted back to September 30, 2012. These losses come about because HECMs are nonrecourse and the home values on the HECM collateral are expected to much significantly lower than the balances due.

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