The various rules that the Federal Housing Administration (FHA) has put into place in the Home Equity Conversion Mortgage (HECM) program have been very problematic, resulting in HECM reverse mortgages serving primarily as a standalone financial product as opposed to a single component of a larger retirement plan. This is according to Jack Guttentag, aka the “Mortgage Professor,” in a new column at Forbes.
“HUD created this ingenious and multi-faceted reverse mortgage program, but its well-intentioned effort to protect it against misuse has been a disaster,” Guttentag writes. “The disaster has stemmed from HUD’s requirement that the HECM be a stand-alone product, as opposed to being part of integrated retirement plans.”
Citing FHA Mortgagee Letter (ML) 2008-24 which bars HECM lenders from “involvement with any other financial or insurance product,” Guttentag contends that this rule stemmed from some abusive transactions early in the history of the reverse mortgage program which saw HECMs being combined with annuities in order to generate two separate streams of cash.
“The stand-alone rule prevents synergies that would benefit retirees, generates excessive loss rates, and is not needed to prevent market abuses,” Guttentag says. “The mortality-sharing feature of annuities allows retirees taking a HECM to draw larger amounts over their lifetimes if they combine it properly with an annuity.”
This is an approach that would be particularly beneficial for seniors who are “house-rich/cash-poor,” who otherwise have negligible financial assets, he says. Were HECMs more readily integrated into retirement plans, current rates of HECM losses would be much lower.
“The program has been subjected to a great deal of bad publicity, for reasons I can’t explain, but the effect has been to subject it to adverse selection,” Guttentag writes. “The HECM client pool has been heavily weighted by borrowers with low credit scores, many in desperate financial condition, who turn to a HECM as their last resort. Many such borrowers fail to pay their property taxes and maintain their properties in good condition.”
On the other hand, HECMs which are integrated into a larger retirement plan have a better chance of drawing borrowers who maintain better payment habits, he says.
“Further, a borrower who obtains a rising payment for life is better positioned to meet home ownership charges than those who exhaust their HECM borrowing capacity in the first few years,” Guttentag writes.
Read the full column at Forbes.