Mtg. Professor: Should The Government Support Reverse Mortgages?

A lack of alternatives and positive benefits to society are to of several supporting factors for the government’s involvement in the reverse mortgage market, writes “Mortgage Professor” Jack Guttentag in a column this week.

In response to the question of whether the government should be involved, Guttentag cites five reasons for the government’s interest in the Home Equity Conversion Mortgage program. 

First, that there is virtually no private market for reverse mortgages, as a result of the economic downturn. Without a substitute, the government’s stake in the program should stand as a means for older homeowners to remain in their homes, he writes. 

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Additionally, Guttentag notes the positive benefits to society of the reverse mortgage program. 

“The HECM program generates what economists term “positive externalities”, which are benefits to society that are not enjoyed by the private firms involved in the activity,” he writes. “By providing a facility for converting illiquid housing wealth into spendable funds, the program reduces the burden on public services of various types that are directed toward seniors in need.”

Other benefits of the program include the ability for homeowners to live off of their assets rather than to risk outliving them, by offering a line of credit that can be used in place of selling off investments. Further, Guttentag stresses the need of the HECM program to serve as a model for other private programs to emerge in the reverse mortgage market. Finally, he urges that the program is self sustaining and should be continued. 

“Some would dispute this because a recent actuarial review of the financial status of FHA’s HECM insurance fund showed a deficit,”  Guttentag writes. “However, estimates of fund value swing around from one year to the next based on forecasts of property values and interest rates, the volume of future business, and changes in program rules. The recent elimination of the standard fixed-rate program, for example, has eliminated the segment of the HECM market that has resulted in the largest losses.”

Read the full column.

Written by Elizabeth Ecker

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  • While the author of the article makes some helpful arguments, he fails to address that many HECMs in the MMI Fund are beginning to terminate in larger numbers each year, making the estimated losses connected to those HECMs permanent, i.e., realized. Like the rest of us the writer has difficulty trying to show any monetary value to the HECM program except for generalizations about home values and changes in interest rates. In fact the principal changes may be increased interest rates on fully drawn HECM Standard ARMs which will make the losses worse for as long as they are active and are not assigned to HUD. The author also had no specific information as to the positive monetary impact HECMs had on other programs such as Medicaid.

    Unlike many in the industry the writer recognizes two key things about fixed rate HECMs. The first is Mortgagee Letter 2013-01 consolidated all fixed rate HECMs into the fixed rate Saver; it did not suspend the fixed rate Standard. The second is that fixed rate Standards are the main source of MMI Fund HECM losses. Kudos to the Mortgage Professor but not to those who are still reeling from the latest testimony from Commissioner Galante on the long-term status of fixed rate Standard HECMs.

    The points made by the writer do not have the strength to reverse the thinking of Republicans in Congress. He is a strong proponent of the HECM program but we as an industry need to provide facts to people like Dr. Guttentag so that they can make a stronger case. For example, many in the industry talk about savings from HECMs for such government programs as Medicaid yet we have no verifiable information as to what those savings might be. If the savings from active HECMs in the MMI Fund equal or exceed $10 billion, Dr. Guttentag and others could make far more persuasive arguments.

    It must also be pointed out that Dr. Guttentag also misses an important issue. One significant reason why the FYE 2012 actuarial report drew such attention is that without spoken disclosure to Congress, HUD transferred over $2.2 billion from other MMI Fund programs during fiscal years 2010 and 2011 to “window dress” how poorly the HECMs in the MMI Fund were doing. Many in Congress showed strong signs of feeling betrayed by the executive staff at HUD as a result of these prior actions. Only those in Congress with an eye for detail would have ever picked these actions up from the written reports.

    (The opinions expressed are not necessarily those of RMS or its affiliates.)

    • Is there any indication that NRMLA can produce or provide those types of numbers to the powers that be. Does RMI have access to that information? I’ve had more than one occasion where the family put off looking at Medicaid and went reverse (for fear of who was calling the shots).

      • wealthone,

        Although I am not familiar with the research being done at Ohio State University on reverse mortgages, this is one area which I hope will be addressed. Other than the opinions of some experts, no one seems to have much objective input into this area. It is doubtful if that RMI has such information. New View Advisors may have captured some of this data.

        There is a strong need for objective, verifiable data and not just opinions or anecdotes.

  • Private reverse mortgages have been unable to compete with the generous terms and nonexistent credit underwriting of Federally insured HECM’s but now that is changing. There could be a window of opportunity opening now as the cost of HECM’s goes up, the available loan proceeds go down and tax and insurance escrows and credit underwriting combine to completely change the nature, character and market demographics of the government product. Maybe we should start talking to Private Mortgage Insurance companies as a starter.

    • hecmvet,

      Who is we as referenced in the following: “Maybe we should start talking…?”

      Are costs going up for all borrowers or just our traditional market? If it is on our traditional market then some of us still have the outlook that the HECM program even as revised will help more of these folks than will any proprietary reverse mortgage product.

      • Cynic,
        Sorry you’re having trouble following my reasoning.
        I was speaking generally of our “industry”.
        Of course “costs are going up in increased MIP for amounts drawn over a certain threshold, a likely change to full residential mortgage credit reports, a likely return to servicing fee set asides that have been subsidized by lenders for the past several years, additional backroom processing and underwriting staff costs that will find their way onto the HUD 1, etc etc.
        “Our traditional market” ? If you’re referring to the very people the program was originally intended to serve then of course they will be affected but so will the financially more secure, “responsible” strategic default experts who will view the program more as a no risk leveraging tool. Apparently HUD and our industry sees our new “market” to be superior to the old one.
        We’ll see.

      • hecmvet,

        Our traditional market has generally been those with mortgages and liens which needed to be paid off. Yet the law never cites such folks as those the program was designed to help specifically. Saying that these folks were the ones the program was designed to help is another myth generated by some of the industry.

        What the purpose section of the law states is:

        “§1715z–20. Insurance of home equity conversion mortgages for elderly homeowners

        (a) Purpose

        The purpose of this section is to authorize the Secretary to carry out a program of mortgage insurance designed—

        (1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and

        (2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.”

        The purpose is broad not focused on any single senior segment of senior homeowners. That means the program is designed as much to accommodate “aging in place” as it is to accommodate those adhering to the principles found in the Standby Reverse Mortgage concept espoused by Salter and Evensky. However, it is the over application of the former rather than the latter which is causing much of the problem in the MMI Fund today.

      • Cynic, apparently, your interpretation of the target market is different from mine. I consider relief of mortgage indebtedness to be a significant purpose of the loan. Odd that you don’t consider it significant….Do you actually meet with prospective hecm borrowers and take loan applications? I can’t tell from your position or input.
        Furthermore, accommodating the interests of financial advisors, in an effort to protect their “managed portfolios” is not necessarily an original goal of the program either, in my humble opinion.
        I think I’ll stick with my opinion on the spirit and intent of the program and my foreboding as to what the new hecm borrower might bring to the project. It is important to also recognize that the new limitations will deter a great deal of interest from the more financially secure consumer and their paid financial advisors which will obviously limit its desirability going forward while limiting its availability to those that I continue to believe were the ones who the program was designed to serve…. Contact AARP if you are still in doubt about the program’s mission regardless of the language in the formal HUD document.
        Where were you when I formed my reverse mortgage company in January 1991/

  • Cynic, I am fully aware of AARP’s “current position” on the law.
    It is not the “understanding of the law” that has gotten the HECM program into the situation it is in today but rather the manipulation and misinterpretation of it.
    I will stick with my “understanding” of the hecm program and its future.
    I look forward to reading your recommendations and possible solutions for our current state of affairs.

    • hecmvet,

      You fail to point to one place in the law where your version of aging in place is supported. With all due respect, I doubt if anyone is “fully aware” of the current position of AARP on HECM law. Like any organizaiton AARP has internal conflicts between senior staff as well as conflicts within its state organizations.

      The law states what the purpose of the HECM program is. You might not like it, but it is what it is. Not once is the goal of “aging in place” directly supported in the purpose clause. It says what it says.

      There are many associated with the industry who agree one way or another with your view but that does not make it right. For example, if aging in place was the purpose of the HECM program why allow HECMs for Purchase. The purpose behind a HECM for Purchase is to allow seniors to age in a NEW place.

      Fixed rate Standards had the intention of helping many less than credit worthy seniors age in place but the results are very mixed and certainly do not provide a source of cash flow throughout retirement. Yes, in paying off fully amortized mortgages, cash flow temporarily increases cash flow for a certain period of time but then when that period is over, cash flow is the same with or without the HECM. Such closed end mortgages are not designed to provide liquidity throughout retirement. They provide cash at one point in time and no more unless the senior is prudent which many have proved they are not.

      As to how to get out of the mess in the MMI Fund, there is only one good answer and that is to take sufficient funds from the Treasury to cover the estimated losses so that they are currently being funded. What HUD is currently doing is insufficient to payoff the estimated losses of the past and at the same time allow the HECM portion of the MMI Fund to meet its portion of capital reserve requirements. If the HUD estimate of a negative net position of $5.2 billion as of 9/30/2013 is correct, then HUD will need about $10 billion to meet the capital reserve requirement plus pay back other MMI Fund programs the over $2.2 billion in funds transferred to the HECM portion of the MMI Fund during fiscal 2010 and 2011. Does anyone believe that a $10 billion transfer from the Treasury could occur without at least the House passing the elimination of the HECM program as found in the PATH legislation?

      What is your solution to the current problem?

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