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Loss of Equity Drives Reverse Mortgage Budget Shortfall

A feature story in the upcoming June issue of Mortgage Banking Magazine will report a 31 percent drop in nationwide housing prices since values peaked in the second quarter of 2006. The hardest hit neighborhoods are found in the interior of California, where prices have plummeted as much as 70 percent.

The story reports that while the country can expect, at most, a 3 percent upswing in prices for next year, some “sand state” markets will continue to experience a valuation slide. In the Miami market, for example, prices will drop another 24 percent in the next 12 months.

Against this negative equity backdrop comes earlier word from the FHA that the HECM program is expected to face a $798 million budget shortfall in FY2010, directly related to the aforementioned decline in house prices. Consequently, HUD has petitioned Congress for almost $800 million for the HECM program, the first such subsidy request since it was established in 1990.

“I knew it was only a matter of time,” says Joseph Kelly, partner, New View Advisors, of the deficiency. He advocates a “low-LTV option” for reverse mortgages “that [would] result in lower losses and lower costs.” Kelly proposes a HECM with a “lower LTV option [that would] eliminate an upfront MIP [mortgage insurance premium] and tap into a whole new market of seniors who maybe don’t need the maximum amount and are cost conscious. Make it a 60 percent LTV,” he suggests, “instead of 80 LTV,” a sort of “HECM2 option,” according to Kelly, a former Lehman Bros. executive.

Meanwhile, Jeff Lewis, senior managing director, Guggenheim Partners, expresses some doubt about the HECM shortfall. “By my calculations the program takes in $1.5 billion to $2 billion in revenue in 2010 [so] that [$798 million] loss is literally impossible.” Especially, adds Lewis, “if you look at how small the universe of outstanding loans that could be maturing is.”

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade, currently specializing in the reverse mortgage sector. He can be reached at nmorse@morsecommunications.com