Bankrate: Will FHA Changes Spark Reverse Mortgage Revival?

The housing market bust correlated strongly with a sharp decline in reverse mortgage origination, but with the federally-insured program set to undergo substantial changes, the product could experience a rebirth, says a recent Bankrate article

Reverse mortgage volume increased significantly during the height of the housing market bubble and were touted as a way for retirees to convert their home equity into cash. However, as home values dropped, so did home equity conversion mortgage (HECM) volume, indicates data from the Federal Housing Administration. 

The FHA’s insurance fund suffered substantial losses on its reverse mortgage book from defaults of HECMs originated prior to the housing bust, prompting upcoming changes to the program, says Stephen Malpezzi, a professor at the Wisconsin School of Business’ Graaskamp Center for Real Estate in Madison, in an interview with Bankrate. 



The effectiveness of the upcoming FHA reforms in the event of another boom-and-bust cycle are unclear so far, says Malpezzi, but the reverse mortgage product has upside. 

“[T]here is certainly room for this market to expand somewhat as market conditions improve, if FHA’s reforms take hold,” he tells Bankrate. “There are about half a million HECMs outstanding, but there are roughly 25 million homeowner households with a head 62 or older.”

Other topics addressed in the interview include changes in home equity and value, the consumer protections that have been put in place in the last few years for reverse mortgages, and how consumers can distinguish the difference between beneficial and non-beneficial usage of the loan.

Read the full article at Bankrate. 

Written by Alyssa Gerace

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  • No doubt the professor is an expert on real estate but he is no expert on HECMs. He claims: “Note that the FHA program has lost a lot of money because default rates of pre-bust HECMs have been high. FHA has been making a number of changes to the program — for example, removing the option to take a fixed rate. It’s unclear to me at this point how effective these reforms will be, should we have another boom-bust cycle.”

    Since all of the HECMs in the MMI Fund (where the principal HECM loss problem exist for HUD) are HECMs endorsed after 9/30/2008, how are they “pre-bust” HECMs? Perhaps some some of the appraised values come from 6/1/2008 but that is the earliest date for appraisals in this fund and that is certainly not representative of the valuation dates of the vast majority of the HECMs in the MMI Fund.

    The professor states that it is the defaults which is troubling the HECM program. While defaults are causing some of the problem, that is minuscule when looking at the overall HECM problem troubling the MMI Fund. It is coming principally from closed end HECMs and high balance due HECMs when compared to current fair market value of the underlying collateral. It seems the professor is lost in accrual basis accounting versus the conservatism principle requiring earliest recognition of losses. At least he is not promoting foolish notions of cash basis accounting we heard within the industry in mid 2009.

    Like the professor, few understand the decline in HECM endorsements but at least he admits it. What the graph above which is taken from his article does not reflect is the fact that the endorsement total so far this fiscal year (11 months of endorsement information) is above the endorsement total for all of last fiscal year. So despite the consolidation of the fixed rate Standard into fixed rate Saver, demand has remained much stronger than most recognized industry prognosticators foresaw. Most prognosticators only saw the pull forward aspect of the consolidation, not the underlying relatively strong HECM demand also reflected in those numbers. That position by those prognosticators was very surprising since some are among the most reasonably optimistic in the industry.

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

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