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.


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

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  • These estimates are highly dependent on mortgage transactions that are accounted for solely within the G&SRI Fund, i.e., HECMs that were originated from fiscal 2004 through fiscal 2008 and totaled 377,023 endorsements. Endorsements in fiscal 2009 through 2012 only totaled 321,751 endorsements. Yet it seems the findings were liberally applied to the MMI Fund without adjustment.

    On what basis were the HECMs selected? Is the selection when sorted by fiscal year of endorsement proportional to total endorsements of each fiscal year when dived by 698,774?

    There is insufficient information to determine if the 69,000 HECM selected are in proportion to the endorsements in each fiscal year. In other words were 5.414% of the 69,000 endorsements (or 3,735 of the endorsements) from the total 37,829 HECMs endorsed in fiscal 2004?

    Where was the collateral located? Does it follow the location of the HECMs still outstanding and active as of the research field days or do they over represent less concentrations of HECMs and under represent more concentrations of HECMs?

    What is meant by 35% of the HECMs went through foreclosure? What is the percentage of HECMs that actually went though some form of judicial foreclosure versus foreclosure through exercise of right of the trustee to sell the collateral? Does the word foreclosure include short sales or deeds in lieu of foreclosure? Of the 35% what percentage were initially due to defaults on payment of property taxes and insurance or even defaults due to failure to maintain the property in structurally sound condition?

    While the NRMLA session may have thoroughly covered these and other points of concern, the article seems subject to likely distortions. What is clear is that some percentage of the HECMs do not represent HECMs in the MMI Fund. So to apply the research findings without adequate adjustments to the MMI Fund is highly undesirable and needs correction if that was what was done.

    Let us hope there will be a follow up article making clarifications where needed.

  • I did my own study and found that the rate of appreciation is directly proportional to whether or not a household had a jar of pickles in the fridge or not at the time of the study. Fascinating!

    • B C,

      I love your comment.

      Bulldog U researchers found appraisers showed more favorable home values on homes with HECMs when the home had both sweet pickle relish AND dill pickles in the frig than with dill pickles alone.

      Perhaps the reason that homes with HECMs that have been in place for a few years show up with less value than comparable homes with more traditional mortgage products is because the average HECM borrower is older than the average mortgagor and older people generally allow their homes to linger in disrepair than younger homeowners.

      The study above is interesting but there are no significant findings presented than are normally assumed when analyzing specific appraisals on homes with HECMs in relation to similar appraisals on homes without HECMs.

    • Actually I think it depends if the appraiser likes dill or sweet. Freud would have a field day with all of this. Perhaps someone should figure out what would happen if the reverse mortgagor could periodically request a increase in his principal limit to get cash for home repairs and improvements. Maybe 1% every 3-years? But the main problem here is they relied on Zillow, at least in my town Zillow values are for stand up comedy routines at the Board of Realtor parties.

  • Humm, ya, it’s kinda like a study that concludes that schools in the affluent suburbs seem to follow a trend toward having better school systems. Wonder why?

    Quote from the article:
    “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.”
    They left out, “and, in general, the extra cash on hand after living expenses to pay someone else to do it.”

    The study-summary could have just read: “The HECM fixer-uppers never get fixer-upper-ed.”

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