A reverse mortgage is a secured loan to an elderly homeowner
on which the borrower’s debt rises over time, but which need
not be repaid until the borrower dies, sells the house, or
moves out permanently.
The “forward” mortgages that are used to purchase homes
build equity – the value of the home less the mortgage
balance. Borrowers pay down the balance over time. Reverse
mortgages, in contrast, reduce equity because loan balances
rise over time.
The reverse mortgage meets the needs of elderly homeowners
who don’t have enough income to do what they want to do, and
have no qualms about not passing a debt-free house to their
heirs.
Reverse Mortgages Before 1988
The history of reverse mortgage programs goes back to the
1970s, but none of the early ventures lasted and none
provided a model for others to follow. Despite the need,
reverse mortgages were a hard sell because the instruments
were complicated, the sponsors were usually unknown, and
elderly homeowners were fearful of making a mistake that
might cost them their home. Some of the early programs
reinforced these fears because they did not provide adequate
consumer protections.
Growth of HECMs, 1988-2008
Under the HECM program, the maximum amount the homeowner can
withdraw is called the “Net Principal Limit” or NPL. The NPL
is determined by:
1.
The lower of the FHA national loan size
limit, the appraised value of the home, and the sale price
if the HECM is used to purchase the home.
2.
The ages of the borrowers, which
determine their expected life..
3. The expected interest rate on the HECM, which determines how fast the borrower’s debt will grow.
4.
The upfront mortgage insurance premium
set by FHA.
5.
Origination fees set by the lender
subject to ceilings set by FHA.
6.
Other settlement costs set by title
insurers and others.
The number of new HECMs rose slowly until 2003, then
accelerated, reaching a peak of 114,000 in 2009 (year ending
in September). During this period, private programs that
worked in much the same way arose to meet demands from
borrowers with higher-value homes whose borrowing power
under the HECM program was limited by legal ceilings on FHA
loan amounts. In 2007, I counted 7 private programs offering
“jumbo” reverse mortgages.
Impact of the Financial Crisis
The financial crisis and decline in home values had a major
impact on the HECM program. Declining home values increased
losses to FHA on outstanding HECMs, and reduced the NPL on
new HECMs. The negative impact of declining property values,
reductions in the assumed rate of property appreciation, and
increasing mortgage insurance premiums were only partly
offset by lower interest rates.
The crisis also drove the private jumbo programs from the
market. These mortgages were all securitized, and when the
private mortgage securities market collapsed, the relatively
small part of it directed to reverse mortgages collapsed
with it. The market hole this created was partly filled by
an increase in HECM loan limits, with a uniform national
limit of $625,000 replacing a patchwork of lower
county-based limits.
The financial crisis also saw the emergence of a new and
unanticipated problem: tax delinquencies. An increasing
number of HECM borrowers are not meeting their obligation to
pay property taxes, which puts them in default and
vulnerable to foreclosure and eviction.
In addition, the three largest HECM lenders - Bank of
America, Wells Fargo and MetLife - decided to leave the
market. This may have been related to fear of a public
relations disaster in connection with tax delinquencies.
However, more than enough HECM lenders remain.
Looking Ahead
FHA has been innovative recently in developing three new
HECM products that expand the options available to
homeowners. A fixed-rate HECM is available to those allergic
to variable rates. A “saver” HECM is available to those
allergic to large upfront fees. And a new HECM for purchase
program makes it possible for a senior to purchase a house
with a HECM in one transaction. These new programs will be
discussed in future articles.
But the most pressing challenge today is tax defaults, which
if not resolved could destroy the HECM program. It will be
discussed next week.
