The HECM reverse mortgage program has been bleeding red ink. Losses on transactions in which the loan balance at termination exceeds the net recoverable property value have been larger than the insurance premiums the Federal Housing Administration collects from all HECM borrowers.
According to news reports, FHA Commissioner Brian Montgomery is considering measures that would reduce the amounts that seniors could draw on reverse mortgages. Smaller draws would result in slower growth in loan balances and, other things being the same, in reduced losses to FHA.
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Other things are not the same, however. Reduced draw amounts would make the program less attractive to potential new borrowers, especially to the type of borrowers needed to make the program self-sustaining. FHA needs to take another look at what needs to be done.
A large proportion of HECM borrowers are financially desperate, as an HECM is their last resort and they draw the maximum amounts permitted. Equity retention is not an objective and they are not scrupulous in maintaining their property.
In contrast to the “desperates,” there is a much larger group whose lives could be enriched by an HECM, for which purpose they would not necessarily need to draw the maximum amounts permitted. If they did take an HECM, many would retain some equity for their heirs, an objective that protects FHA against loss. For these “solid seniors,” the HECM is optional, but very few exercise the option. HUD’s objective should be to attract more of them.
I have three suggestions for accomplishing this, listed below in order of complexity, and the first two are considered in this article, and the third will be in a forthcoming article
Basic education on HECM draw potential
This is directed to the large group of senior homeowners who could profit from an HECM reverse mortgage but under existing circumstances are not motivated to pursue it. They might pursue it if information about how an HECM might help them was readily available from a highly visible and completely trustworthy source. That source could be HUD’s website.
I have already done the work for HUD. My site contains a series of tables on HECM draw amounts of different types, which are updated whenever HECM prices change. The tables are directed at four major ways that a HECM reverse mortgage can help seniors:
- Table 1 is directed at those who are still making payments on a standard mortgage, showing how large a balance they can pay off with an HECM reverse mortgage.
- Table 2 is directed at those who need to supplement their income, showing the monthly payment they can draw for as long as they live in their home, or for shorter periods.
- Table 3 is directed at those who want to prepare themselves for future contingencies or opportunities, showing the credit line available to them at closing, after 12 months, and after 10 years.
- Table 4 is directed at those who want to buy a house without incurring a monthly payment, showing the amount they can draw for that purpose from an HECM, and the amount required from other sources.
I would be happy to place these tables on the HUD site and support them without charge.
Convert the HECM market into a shoppers market by certifying MLNs
The existing market for HECMs can best be described as a “gotcha” market in which distrust is a major by-product. The objective of HECM loan providers is to attract potential borrowers into making contact, and then collecting the information needed to entangle them in a process that encourages them to take an HECM but discourages them from looking elsewhere. Prices are disclosed only after a senior discloses the property address, their email address and in some cases their Social Security number. As a result, very few prospective HECM borrowers contact more than one lender.
An HECM MLN is an independent entity that will help seniors make the best decision among HECM options and obtain the best deal offered by multiple lenders on that option, at a single source. Seniors select the lender they want to deal with from among those participating in the MLN, based on information provided by the MLN. MLNs would replace the gotcha market with a shoppers market.
MLNs would be certified as providing the following functions:
1. Compilation of price data from multiple lenders: The MLN should maintain a relationship with enough lenders that it can offer at least three independent price quotes in every state. This can be done with three national lenders that operate in every state, or with a larger number of lenders that have limited geographical coverage.
2. Provision of draw amount trade-off technology: The MLN should provide an easy-to-use tool that allows a senior with no prior HECM knowledge to define the HECM draw option or options that they want. The tool must allow the senior to try out different combinations of draw options to find the preferred combination.
3. Provision of decision metrics: The MLN should provide data on the particular metrics that are relevant to each senior’s selection of a lender. The required metrics are:
- Maximum cash draw at closing.
- Maximum sum of cash draw at closing and after 12 months.
- Maximum initial credit line.
- Maximum credit line after X years where the borrower sets X.
- Maximum monthly payment for as long as the borrower resides in the house.
- Maximum monthly payment over Y years where the borrower sets Y.
- Minimum debt after Z years where the borrower sets Z.
Back in the 1990s, HUD toyed with the concept of a computerized loan origination network or CLO in connection with standard mortgages. Nothing ever came of it, perhaps because the need was less then compelling. I changed the name from CLO to MLN because HECMs are very different and the need for what a network can provide is more than compelling.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
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