An industry at the crossroads
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.
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.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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