Homes with HECMs Appreciate More Slowly, But Appraisals Play Key Role

Homes associated with Home Equity Conversion Mortgages tend to appreciate slower than their counterparts without reverse mortgages, though a variety of factors can either enhance or lessen the effects.

In general, over an extended period of time, HECM homes generally have a depreciation of about 10% relative to other homes in the same ZIP codes, according to a new study from Longbridge Financial CEO Christopher Mayer. 

Mayer, along with George Washington University associate professor Min Hwang, received funding and data from the Department of Housing and Urban Development to explore the relationship between taking out a reverse mortgage and one’s home-value appreciation over time. Using information about all HECMs originated between 2004 and 2012, Mayer and Hwang were able to match about 69,000 loans against property record information from CoreLogic and home price information from Zillow.

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Of those 69,000 loans, 35% had gone through foreclosure. 

“The data initially looked kind of depressing,” Mayer said when discussing his results at the National Reverse Mortgage Lenders Association’s annual conference in San Francisco last month. “You might look at that and say: No wonder the program’s in trouble.”

Mayer was referencing recent negative actuarial reports that show the HECM program creating significant loss potential for HUD and the Federal Housing Administration. But he emphasized that loans that homeowners either paid off or refinanced were not included in those results, since they do not appear as a home sale. Because a significant chunk of those homes changed hands during the housing crisis, many were underwater as well, Mayer noted.

While the value of HECM homes declined faster relative to other properties between 2007 and 2008, houses with reverse mortgages actually held onto their value better than the median price in the ZIP code by 10.5 to 11 percentage points the following year. That, Mayer said, was the result of appraisal reform in the HECM community, which saw more accurate home values emerge starting around 2009.

“Appraisal reform — that did affect HECM properties in a way that didn’t affect other properties,” Mayer said. “And it’s consistently stayed up since then. HECM properties have performed much, much better than before.”

Still, even with the mitigating effects of stronger appraisals, HECM properties have the downside of older homeowners who are less able to perform needed repairs or routine maintenance. In addition, lower-value homes with smaller maximum claim amounts had significantly lower appreciation rates than other properties — up to 19% for properties under $150,000.

“That’s a pretty big number on a relative basis, and is consistent with the idea that there are much larger losses for the lowest-price homes.”

Other highlights from the research indicate that full-draw, fixed-rate mortgages lead to a 7% lower appreciation rate for the associated homes, an effect that also extends to adjustable-rate mortgages: For every 10% increase in draw percent, the house will result in 0.7% lower appreciation rate. In addition, contrary to popular wisdom, homes with HECMs in high-priced ZIPs and metro areas appreciated at slightly lower rates than other properties.

And finally, for every additional 100 points in a borrower’s FICO credit score, the home appreciates about 0.4% faster.

From a policy standpoint, Mayer said the research could illustrate the benefits of charging lower mortgage insurance premiums for those who borrow less money, re-casting actuarial models to incorporate the benefits associated with appraisal reforms, and encouraging cash-for-keys transactions — which can cut HUD’s losses on foreclosures by 20% to 25%.

“Some of the problems were the result of appraisals done during a period of time when they were not done in a quality fashion,” Mayer said. “As long as you underwrite to that, that makes sense from a financial standpoint. I’m not sure that the actuary is always taking that into account when doing the calculations.”

Written by Alex Spanko