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Get Government Out of Reverse Mortgages, Commentator Says

The Department of Housing and Urban Development should not be in the business of insuring reverse mortgages, a Heritage Foundation researcher claimed in a commentary piece published Tuesday.

Writing for The Daily Signal, a conservative news and commentary website founded by Heritage, John Ligon claimed that HUD’s backing of Home Equity Conversion Mortgages is a drag on taxpayers that holds back private-market competition in the reverse mortgage marketplace.

“Overall, American homeowners deserve to have more options in reverse mortgages than the limited set engineered by federal bureaucrats, and taxpayers should not have to cover the costs of the Department of Housing and Urban Development’s financially insolvent loan program,” Ligon wrote.

Ligon, who focuses on housing and tax policy in his research work for the right-leaning D.C. think tank, points to the most recent actuarial review of the Federal Housing Administration’s Mutual Mortgage Insurance Fund (MMI), which placed the HECM Fund’s economic value at negative $7.72 billion for fiscal 2016.

“Federal taxpayers could face growing economic losses in the insurance program over the next several years,” Ligon wrote, calling out the actuary’s prediction of negative $12.54 billion in economic value by 2023.

His piece did not note the general volatility of the HECM Fund: For instance, the 2015 actuarial report assigned an economic value of positive $6.78 billion, with a projection of $13.67 billion in the black by 2022; in 2014, the actuarial review found a value of negative $1.17 billion, with a projection of positive $1.04 billion by 2021.

Ligon additionally called out the higher default rate on HECMs as compared to home equity loans and other “forward” mortgages: Specifically, Ligon cited research from the November 2015 issue of the Journal of Urban Economics, which found a tax-and-insurance default rate on HECMs of just under 12%. By comparison, Ligon wrote, home equity lines of credit and other forward loans have default rates under 10%.

Instead of the current system, Ligon advocates for a purely private reverse mortgage industry, linking to a 1996 study about HECMs that includes a tidbit about the first reverse mortgage, a private loan issued in Portland, Maine in 1961.

“A private reverse mortgage market predates the federal government’s foray into home equity conversion mortgages, and more importantly, homeowners already have private means to borrow against equity the have accumulated in their homes,” Ligon wrote, referring to “forward” home equity lines of credit. 

While Ligon’s opinion obviously does not reflect that of the current government, it does provide an interesting window into one particular conservative attitude toward reverse mortgages at a time when the industry is anxiously awaiting news about the program’s fate under the new HUD budget; as RMD reported earlier this month, the department would see its total bankroll slashed by 13.2% if President Trump has his way, though specific details about program-by-program funding aren’t expected until May.

Taken objectively, the concept of the federally-backed HECM combines both stereotypically “liberal” and “conservative” approaches to personal finance: Despite being insured by the federal government, the program also allows consumers to fund retirement or other expenditures with their own private equity, potentially allowing them to avoid the use of state-funded relief programs.

President Reagan signed the legislation that kicked off the federal HECM program back in 1988; after a positive pilot program, it was expanded under the administration of his successor, the first President Bush.

Read Ligon’s full piece here.

Written by Alex Spanko