GAO Report: Reverse Mortgage Woes Stem from Falling Home Prices

In a review of the work done by the Federal Housing Administration (FHA), the government “watchdog” Government Accountability Office (GAO) released a recent report outlining some of the challenges facing FHA’s reverse mortgage program.

In its report, GAO found that falling home prices were a main driver of the agency’s negative economic position of $2.8 billion at the end of 2012, but there were additional concerns about longevity risk and tax and insurance defaults due to borrower funds drawn upfront.

In its November 2012 annual report to Congress on its Mutual Mortgage Insurance Fund, FHA identified a number of challenges facing its Home Equity Conversion Mortgage (HECM) program.

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At the forefront was the large majority of borrowers maximizing the upfront draw under the HECM Standard fixed-rate product.

The vast majority of recent borrowers took out 80% or more of the maximum amount possible in one initial cash draw, GAO reports in response.

Researched performed by independent actuaries indicate that HECM loans with high upfront draws are twice as likely to have tax and insurance (T&I) default than loans with initial draws of 60%. Additionally, these loans were also found to be four times as likely to default than those with initial draws of 40%.

T&I defaults stemmed largely from homeowners withdrawing all eligible cash upfront, resulting in insufficient cash flow in later years to maintain property upkeep, taxes and insurance payments—incidences of which have increased in recent years, GAO notes.

Another challenge for FHA was increased property conveyance rates, termination upon which increased sharply during this past year,

GAO research indicates that this was directly related to falling home prices, as owners and estate executors were faced with mortgage balances greater than property value at the time of borrower exit from the home.

Because of this, owners and executors were less willing to market and sell the property than those with positive equity in the home.

In such cases, GAO notes that there is no financial benefit from managing property sale and so those responsible for the home are more likely to convey the property to HUD for sale.

Property management and marketing costs tied to these homes conveyed to HUD cost approximately 12% of property value, thus increasing the severity of loss for FHA.

Slower borrow mortality and termination speeds have also increased the likelihood that loan balances will exceed property values at the time of loan terminations, according to the report.

Since January 2013, FHA has made and proposed changes to its HECM program to address some of these challenges, most notably by halting the use of its Fixed-rate Standard HECM product.

Additionally, FHA proposed other changes to Congress, including reducing the amount borrowers can draw at the time of loan origination, as well as issuing new incentives for estate executors of HECM borrowers to dispose of properties themselves rather than conveying them to HUD.

Written by Jason Oliva

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  • Jason,

    I thought FHA was raising the MIP by 10 bps on forward mortgages, not HECMs. The only thing HUD has done to the HECMs for now is to announce the end of their insurance coverage on new fixed rate HECM Standard originations and how that will work.

    It is very confusing to read on a paragraph allegedly addressing HECM changes that there is a 10 bps increase in MIP. That paragraph reads: “Since January 2013, FHA has made and proposed changes to the HECM program to address some of these challenges. The agency raised insurance premiums by 10 basis points and has halted the use entirely of its Fixed-rate Standard HECM product.”

    Please clarify if you intended to tie the 10 bps increase in MIP to HECMs because it sure does look like it. If you did, can you provide a Mortgagee Letter or other source where we can read up on it. ML 13-4 stated it applied as follows:

    “The changes to the duration of the annual MIP as specified in this ML are effective for all Single Family FHA programs for which FHA charges an annual MIP except:

     Title I

     Home Equity Conversion Mortgages (HECM).”

    Please clarify.

    • My apologies, you are correct to assert that the 10 basis point MIP raise only applies to FHA’s forward mortgages. I appreciate the clarification, and have adjusted the article to represent the correction.

  • Perhaps the most revealing and scariest part of the entire report was pages 19 through 20. While each of the following three points had more presented here is a brief summary:

    “1. FHA’s risk-assessment strategy was not integrated throughout the organization….

    2. Contrary to HUD guidance, the Office of Single Family Housing had not conducted an annual, systematic review of risks to its program and administrative functions since 2009….

    3. The Office of Single Family Housing’s risk-assessment efforts did not include procedures for anticipating potential risks presented by changing conditions….”

    This is a bruising report on how well HUD is doing in analyzing risk. While FHA may want new tools to manage the HECM fund, it seems rudderless in anticipating risk, its impact and how changes conditions will impact risk.

    Based on this report alone, is there any question why HUD failed to listen to those who warned about the dangers of the fixed rate Standard early on? So how did HUD determine that 1.25% was the right rate for HECM ongoing MIP? Or that rise in rates plus the introduction of Savers would adequately offset losses from fixed rate Standards? Is it any wonder all of these measures were such a miserable failure?

    Someone stated the other day that if the risk managers were doing their job as if the correct assumption was they are. What GAO appears to be saying is that the office of risk management at HUD is a name with no substance.

    Of all things in this report, this is absolutely the scariest.

  • First off, the report talks as if the senior had a choice on the standard fixed rate product to pull all or part of the cash out. Not so, we all know the fixed rate product forces the senior to take 100% of the funds in a lump sum up front!

    Also, the incentive for the industry, as far as commissionable dollars for LO’s and companies were so great, the fixed product was pushed from here to Sunday by everyone!

    Get this one! Just now the report is realizing falling home prices is what the main driving force causing the $2.8 Billion dollar negative paper loss balance. Are we brilliant or are we brilliant!

    They say that T&I defaults are largely due by homeowners drawing out the maximum amount of cash. Again, on the fixed product there is no choice in this matter.

    However, do you just might think one of the reasons and maybe a major reason for seniors defaulting on there T&I is due to the economy. Look at the job loss amongst seniors, look at the failure of stock funds, 401-K’s and inflation. Look around, the reasons are many more than just the senior taking the full maximum amount on the fixed rate loan.

    The GAO report does not impress me. We have to go deeper than this report to come up with the real reason’s why the problems are what they are with FHA. The reverse mortgage product is not the main problem here. The problem stems from many decisions made back to as far as 1999, that is a story for another day! However, I think you all get the point I am trying to make:)

    John A. Smaldone

    • By the GAO stating that the principal problem with the HECM is the housing crisis is a strong confirmation that the program itself is not the trouble but rather one of its most significant underpinnings, a relatively low growing home value environment. That confirmation supports the position of not just HUD but also the industry and was quite helpful in the fight against putting a total moratorium on the HECM program.

      The overall default picture is based on the economic times we live in; however, when it becomes very apparent that the default rate of those with close ended HECMs is much higher than that of those with open ended, getting the obtaining of a closed ended HECM becomes a extremely significant factor in looking at how to lower the overall default rate especially when so many borrowers are directly receiving proceeds at funding on their closed ended HECMs.

      FHA Commissioner did the right thing in terminating the fixed rate Standard; however, it only seems right that the fix is not temporary but permanent since downturns can come at any time over the life of a HECM. Fixed rate Standards are just too risky.

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