A leading expert on reverse mortgages called on the Department of Housing and Urban Development to consider offering lower ongoing costs for borrowers who use the loans as part of an overarching retirement plan.
Writing on his Mortgage Professor blog, Jack Guttentag asserts that Home Equity Conversion Mortgages used to boost a homeowner’s overall portfolio — which could also include existing savings accounts and deferred annuities — represent less of a financial risk to HUD, as these borrowers are more likely to be able to maintain their properties and avoid tax-and-insurance defaults.
“HECMs that are part of a well-designed retirement plan should carry little risk to HUD because borrowers will not face impoverishment that leads to neglect of the home,” Guttentag wrote. “HUD might be justified in imposing lower insurance premiums on such HECMs.”
He also framed the development of such a program as a public good aimed at creating new potential funding streams for seniors in retirement, particularly given changing benefits at many American workplaces.
“Given the rapid phase-out of defined benefit pension plans, furthermore, it should be public policy to encourage replacement plans to fill the gap,” Guttentag wrote.
Recent reports about the state of the HECM portfolio — including the report last fall that placed reverse mortgages’ overall drag on the Mutual Mortgage Insurance Fund at $14.5 billion — have prompted many players in the space to weigh in on how to strengthen the program and fight back against sagging origination totals.
Last week, for instance, multiple professionals told RMD about their wish list for back-end reform at the Federal Housing Administration, including ways to expedite the foreclosure process and reduce inefficiencies around seasoned loans currently serviced by HUD and FHA.
Guttentag’s theories, meanwhile, focus on how HUD can potentially bring its mortgage insurance premiums more in line with the risk associated with each loan. Under the most recent set of program rule changes, all HECM borrowers play a flat 2% upfront insurance premium based on the maximum claim amount, followed by 0.5% of the loan balance per year thereafter. Guttentag argues that not all HECMs are created equal in terms of risk for HUD losses, so not all loans should be subject to the same premium.
“The logical way to determine whether insurance premiums should vary with the draw option selected by the borrower is to compare loss rates on transactions grouped by draw option,” he wrote, though he noted that more detailed analysis from HUD would be necessary to develop a truly progressive premium structure.
The adjustable premium idea comes in the same month that Guttentag suggested attracting more “solid seniors” — borrowers who care less about maxing out their claims amounts, and more about supplementing their retirement income — to help right the MMIF shop.
Finally, Guttentag posits that regulations against using HECM proceeds to fund annuities are a too-strict relic from a bygone era of unscrupulous lenders and financial advisors, arguing that these borrowers may actually present a net positive to HUD.
“A borrower who uses a HECM to finance the purchase of an annuity may be a better credit risk than a borrower drawing a tenure payment,” he wrote. “Borrowers who have moved to a nursing home have an incentive to conceal the move if they are receiving payments that cease when they become non-occupants, but they have no such incentive if they are drawing annuity payments that continue until death.”
Check out the full analysis at the Mortgage Professor.
Written by Alex Spanko