Download here - Reverse Market Insight

The Home Equity Conversion Mortgage Program:
Issues in HECM Finance and What the Future
May Hold
Presented by Ed Szymanoski and Colin Cushman
US Department of Housing and Urban Development
December 2008
The views expressed are those of the authors, and not necessarily
those of the U.S. Department of Housing and Urban Development.
Topics To Discuss
 HUD’s Financial Management


What’s At Stake
Managing Risk
 Loan Level
 Portfolio Level

Effect of Falling House Prices
 Financing HECM in the Private Sector



Primary Market
LIBOR vs. CMT
Secondary Market
 Non-agency securities
 Ginnie Mae securities
 What the Future May Hold



Rising Demand
Trends in Supply
New Directions
 Websites for Reference
2
HUD’s Financial Management of HECM
 HUD does not lend money: HECM insures private lenders against
losses
 Encourages lenders to offer reverse loans
 Offers highly competitive limits on cash advances
 Protects borrowers from lender failure to advance funds


Almost invoked after lender disruptions due to Hurricane Katrina
Increased importance in current banking crisis
 Risk levels managed by limits on loan advances to borrowers
 Cost of insurance paid by premiums assessed on all borrowers
3
What’s At Stake?
 HECM is supposed to be self supporting
 Unlike a private lender/insurer FHA does not have
to earn profits to pay shareholders for use of their
capital
 Thus, HECM can offer borrowers better lending
terms than most private lenders
 However, HECM insurance puts taxpayers at risk
 Long term viability of HECM depends on how
well HUD manages the financial risks
4
Money
How Reverse Mortgage Losses Occur
Without Mortgage Insurance
Loss
Property Value
Loan Balance
T0
Time
Time of Loan Termination
T1
T2
Time at Which Losses Begin
5
Losses Are Smaller and Occur Later if Amount Borrowed is Less
Larger Loss at
Termination with Higher
Loan Balan ce
Money
Smaller Loss at
Termination with Lower
Loan Balance
Property Value
Loan Balance
(higher)
T0
Loan Balance
(lower)
Time
Time of
Termination
T1
T2
T3
Times at Which Losses Begin
Conventional (not government insured) reverse mortgage lenders in the US often offer smaller loan amounts
to reduce risks. They find it hard to compete with government insured HECM except in the “jumbo” market
for homes valued above FHA loan limit of $417,000. Note: conventional market has become inactive due to
6
current financial crisis.
HECM Volume (Cases Insured) by Fiscal Year
Fiscal Years Run from October 1 to September 30
Insured through 9/30/2008
120,000
112,014
107,367
100,000
80,000
76,282
60,000
43,081
37,790
40,000
18,084
20,000
13,049
-
157
389
1990
1991
1,019 1,964
3,365 4,166
3,596
1992
1994
1996
1993
1995
5,208
1997
7,895
7,923
6,637
7,789
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: HUD data.
7
Managing Risk – Loan Level
Concept of Principal Limit
 Principal Limit Factor Times Adjusted Property Value (Maximum
Claim Amount) Sets Each HECM Loan’s Principal Limit
o
o
Factor is Like a Maximum Loan-to-Value Ratio
Contains Imbedded Actuarial Assumptions
- Loan Termination Rates (mortality and move-out)
- House Price Appreciation (mean and variance)
o
o
Factor Varies by Interest Rate and Borrower Age
Principal Limit Factors were Designed to Break-Even
 Principal Limit Controls the Amounts and Timing of Cash
Advances on a HECM
o
o
Net Present Value of All Cash Advances Must Not Exceed the
Principal Limit
Once Borrower Reaches Principal Limit, No More Cash Advances
8
HECM Insurance Model
Set Actuarial Assumptions



House Price Growth
Mortality/Moveout
Expected Interest Rates
Set Premium Structure
 2% Max. Claim Upfront
 0.5% Annually on Balance
Solve For Factors Such That
Expected Revenues = Expected Losses
9
HECM Principal Limit Factors
for Selected Ages and Interest Rates
Interest
Rate *
Age of Borrower at Loan Origination
65
75
85
0.489
0.609
0.738
8.5%
0.369
0.503
0.660
10.0%
0.280
0.416
0.589
* Expected Rate ( e.g., 10-Year Treasury Rate + Lender's Margin)
Factor decreases
with interest rate
7.0%
Factor increases with age
10
How Principal Limit Factors Determine Payment Limits
75 Year Old Borrow er and 7 Percent Expected Interest Rate
Appraised Value & Maximum Claim
Times Principal Limit Factor
$
100,000.00
0.609
Initial Principal Limit
60,900.00
Less:
Upfront Premium
Loan Closing Costs
Servicing Fee Set Aside
Initial Cash to Borrower
(2,000.00)
(3,000.00)
(4,084.96)
(1,815.04)
Net Principal Limit
50,000.00
Maximum Monthly Tenure Payment
367.20
(Without a line of credit)
Maximum Line of Credit
50,000.00
(Without monthly payments)
11
Managing Risk – Portfolio Level
 HECM Demonstration Period (1989 - 1998)


Originally limited to a small pilot or demonstration program
Mandated reports to US Congress included actuarial reviews
 Permanent HUD Program (1998 – present)

Subject to same portfolio risk management requirements as
HUD’s other credit guaranty programs pursuant to
 Chief Financial Officers Act
 Credit Reform Act
 Other laws and guidance


Annual estimates of remaining liability for existing portfolio
reported in HUD’s audited financial statements
Annual estimates of credit subsidy rate for future cohorts
reported in federal budget
12
Financial Management Reporting and Budget Process
Remaining Liability (Existing Loans Only)
Actual Activity
Year 0
Remaining Liability for Financial Reporting
Year t
Year 30 *
(last year of actual data)
(Re-estimate of total net liability is actual activity plus estimated remaining liability)
Credit Subsidy Rate (Future Loans Only)
Credit Subsidy Rate for Next Year’s Budget
Year 30 *
Year 0
* HECM Requires Analysis Beyond Year 30
13
Credit Reform Act of 1990

Subsidy cost for federal loan programs (direct loans and
guarantees) must be fully budgeted in the year in which the loan is
made

Eliminates prior practice of yearly cash budgeting which often
deferred long term loan costs to future budget years

Subsidy cost is net present value (NPV) of cash flows to and from
the government (except administrative expenses) associated with
the loan or guarantee over the full term of the loan

Positive subsidy requires Congressional appropriation prior to
loan commitment

Negative subsidy represents receipts to government

Administrative costs are budgeted separately on a cash basis
14
HECM Has Consistently Operated with
“Negative” Credit Subsidy
 Negative subsidy means NPV of expected revenues
exceeds NPV of expected costs
 HECM subsidy rate projected for FY2008 is negative 1.68
 How to reconcile with break-even pricing model:


Current Economic Forecast Different
Actual Program Experience Different from Assumptions
 HUD operates other credit guaranty programs with
negative subsidy rates


Prevent rate from going positive due to small economic shifts
Maintains stability of program’s features
15
Effect Of Falling House Prices
Expected Price Declines in 2008-2009 Compared With HUD’s Long Run Assumption (4% per YR)
Historical and Forecast US House Price Index
October 2008 Forecast
Actual
4% Per YR Assumption
500
400
300
200
100
20
18
20
16
20
14
20
12
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
0
19
90
OFHEO National House Price Index
600
Year
Forecast by Global Insight
16
HECM Solvency is Tied More Closely to Long Run
Prices than Traditional Home Purchase Mortgages
 Home purchase mortgages terminate (default) at much greater rates
when short term house prices fall
 HECM borrowers have no incentive to terminate when prices fall and
may “weather the storm” until prices recover
 HUD is currently analyzing the effect of recent house price declines on
HECM




HUD’s losses will increase as re-estimates are made – under credit
reform re-estimates are paid for out of standing appropriation from
Congress
Older cohorts will maintain negative total net liability (net surplus of
cash inflow to the government)
Recent loan cohorts may now have positive total liability (net cash
outflow).
Future cohorts, beginning with 2010 vintage, are likely to remain
sound (keep negative subsidy)
17
Primary Mortgage Market Update
 Primary market includes all activities that relate to originating
HECM loans
 Main participants are FHA-approved mortgagees (banks,
mortgage companies, and loan correspondents) who have
originated at least one HECM loan during the year
 Correspondent originators only take applications: the
underwriting and funding of loan comes from a sponsor who
meets more stringent FHA requirements
 For the 12-months ending 5/31/2008, there were 4,060 mortgagees
who originated at least one HECM loan: 401 sponsors and 3,659
correspondents
 This is up from 2,296 (309 sponsors and 1,987 correspondents)
for the 12-months ending 5/31/2007
18
Consolidation in the Primary Market
 Major reverse mortgage lenders being purchased by big
banks and insurance companies



Bank of America bought Seattle Mortgage
Genworth Financial (insurance conglomerate) bought Liberty
Reverse Mortgage
Metlife bought Everbank (formerly BNY Mortgage)
 Is this a result of credit crunch or a longer term trend?


Big banks may see opportunity
Insurance companies accustomed to actuarially based cash
flows
 How will the reverse mortgage industry emerge from the
current crisis?
19
What is the Secondary Market?
 The secondary mortgage market is simply a
financial market in which existing mortgage loans
are bought and sold.
 Often the sale of existing mortgages involves
securities or bonds collateralized by the value of a
pool or group of mortgage loans.
 Participants in the secondary market are mortgage
lenders, commercial banks, investment banks,
pension funds, and agencies such as Fannie Mae,
Freddie Mac, or Ginnie Mae.
20
Secondary Market for HECM Is Evolving
 Lenders prefer not to hold HECM loans on balance
sheet


Depository lenders: difficult to manage capital
requirements while holding illiquid assets
Non-depository lenders (mortgage banks): only
structured to warehouse mortgages
 Until 2006 HECM loans were sold to a single investor:
Fannie Mae (a government sponsored enterprise)



Fannie Mae has ability to hold HECM in portfolio
Fannie Mae participation was a critical factor in success
of HECM
However, single investor is not a competitive market
21
Secondary Market for Reverse Mortgages Will:
 Broaden lender distribution channels (more lenders to originate loans)
 Expand investor base

Reverse mortgage cash flows have desirable investment features
 Yields comparable to forward mortgages
 Predictable cash flows (less sensitive to interest rate and house price changes than forward
mortgages)
 Provide unique portfolio hedging opportunities

Banks can hold securities in portfolio more easily than illiquid whole loans

Expect different types of institutional investors as well
 Insurance Companies
 Pension funds
 International Investors
 Help realize full market potential



Become a mainstream loan product
Product innovation
Reduced borrowing costs
22
Secondary Market Developments
 Challenges to Securitizing A Reverse Mortgage Compared to
Traditional “Forward” Mortgage


Two-way flows of cash
Cash inflows only upon loan termination – difficult to structure
current pay bonds
 Despite challenges, first US reverse mortgage structured security
issued in 1999 (using conventional loans)
 First HECM-backed security issued in 2006
 In 2007 Ginnie Mae announced its HECM MBS program
 In 2007 HUD permits HECM adjustable interest rates to be indexed to
LIBOR (in addition to US Treasury) to increase investor demand
Note: Ginnie Mae is the Government National Mortgage Association
– an agency within HUD
23
LIBOR-Indexed HECM Will Enhance the Secondary Market
 LIBOR is acronym for “London Inter-Bank Offered Rate”





An international interest rate index determined on the basis of the world
economy
Increasingly used for ARM loans in the United States
More closely matches the cost of funds for global investors
Very popular for secondary mortgage market investors – makes LIBORindexed mortgage backed securities more liquid (easier to sell)
Greater liquidity means lenders can offer lower margins to borrowers
 While the LIBOR rate may often be slightly higher than a comparable
maturity Treasury rate, the better margins available for LIBOR-indexed
loans often make these loans a better deal for consumers.
 Although LIBOR may diverge from Treasury rates from time to time, the
two indices have historically tracked each other closely over time.
 There is no guarantee that the consumer will be better off with a LIBORindexed loan, but such a loan need not be considered exotic or unusually
risky on the basis of being indexed to a rate set outside the U.S.
24
Adjustable Rate HECMs – Old Policy
 Since HECM began in 1989, adjustable rates had to be pegged to Constant
Maturity Treasury (CMT) rates


CMT refers to weekly average yields of all Treasury notes and bills having a
given remaining time to maturity (e.g., 1-Month, 1-Year, or 10-Years)
The CMT rates are published weekly by Federal Reserve Board
 Whenever the rate is to be adjusted after closing, it is to be set at the value of
the index in effect as of a specified “look-back” period (30-days) plus
lender’s margin (subject to annual and life of loan rate caps as appropriate)
 Annually adjusting HECM had to use 1-YR CMT as the rate index
 Monthly adjusting HECM also had to use the 1-YR CMT (but with lower
margin because less interest rate risk for lender)
 All HECM ARMs had to use 10-YR CMT plus margin for the expected rate
NOTE: Fixed Rate HECM have always been permitted and are not indexed
to anything. Expected rate for a fixed rate HECM is the fixed note rate.
25
HECM ARMs – New Policy Adds LIBOR
 Mortgagee Letter 2007-13 added LIBOR as an acceptable
index, but permitted lenders to continue using CMT
 Once chosen, the index cannot change
 Annually adjusting HECM now may use either


1-YR LIBOR
1-YR CMT
 Monthly adjusting HECM now may use



1-MO LIBOR
1-YR CMT
1-MO CMT (this was also added by ML-2007-13)
 Expected Rate is now:


10-YR CMT plus margin for all CMT-indexed HECM
10-YR LIBOR Swap Rate (dollar denominated) plus margin for
all LIBOR-indexed HECM
26
LIBOR SWAP Rates
 Unlike US Treasury Bonds, LIBOR rates are not available for maturities greater than 1-Yr. The
10-Yr LIBOR “swap rate” is used as the equivalent of the 10-Yr Constant Maturity Treasury
rate for calculation of the “expected rate” on a HECM.
 An interest rate swap is a financial contract used by institutional investors to reduce interest rate
risks. For example, a fixed payment stream is exchanged for a floating (adjustable rate)
payment stream for a predetermined time period.
 In a swap, there are two parties to the contract. In the type of swap noted above, one party
prefers to receive floating rate, while the other prefers to receive a fixed rate.
 The floating side of the swap contract is usually set at the LIBOR rate for the relevant currency
(typically the 3- or 6-month LIBOR for dollar denominated swaps) and time period (in this case
10- years).
 Once the floating side terms are specified, the “swap rate” is determined competitively in the
financial markets. It simply represents the fixed interest rate that investors would be willing to
exchange for the specified floating rate for the duration of the contract.
 LIBOR swap rates reflect the financial markets’ expectations about future floating rates – thus
the swap rate is ideal for setting the expected rate with LIBOR-indexed HECM.
 LIBOR swap rates are published daily by the International Swaps and Derivatives Association
(ISDA) and are reported by various financial news services and on the US Treasury website.
27
Comparison of 1-M onth LIBOR (US Dollar Denominated) and the 1-M onth
Constant M aturity US Treasury Yield (CM T)
1-Month LIBOR
1 Month CMT
6.0
5.0
3.0
2.0
1.0
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
0.0
Sep-01
Percent
4.0
Month and Year
Note that LIBOR is almost always higher than the CMT because LIBOR is a corporate borrowing rate and not a
government borrowing rate. The two track closely in most time periods. Recent decline in CMT (since July 2007)
reflects rate cuts by US Federal Reserve in response to the subprime crisis. LIBOR declined for part oif this period, but
rose as banks became reluctant to make interbank loans.
28
LIBOR (1-M O) and CM T (1-YR) Plus Typical Lender M argins
for M onthly Adjusting HECM
Historical Relationships June 2006 through October 2008
1-Mo LIBOR +100
1-YR CMT + 150
1-Month LIBOR
1-YR CMT
8.00
7.00
Percent
6.00
5.00
4.00
3.00
2.00
1.00
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Oct-06
Sep-06
Aug-06
Jul-06
0.00
Month and Yr
If current HECM ARM index policy were available since June 2006, this chart estimates monthly adjusting note rates over time
for LIBOR-indexed vs. CMT-indexed HECMs with typical lender margins. Note that the CMT-indexed HECM may use either the
1-Yr or 1-Mo CMT, but most frequently observed is the 1-Yr CMT. The period from August 2007 to October 2008 is unusual as
CMT rates diverged from LIBOR during the finanical crisis. (Federal Reserve was cutting short term rates, while LIBOR fell buy
then rose due to reluctance of banks to make interbank loans.) In "normal" times HECM note rates using either index would
track closely.
29
Estimated Expected Rates for Monthly Adjusting HECMs :
LIBOR Swap Rate (10-YR) and CMT (10-Yr) Plus Typical Lender Margins
Historical Relationships June 2006 through June 2008
8.0
10-YR LIBOR Swap + 100
10-YR CMT + 150
10-YR LIBOR Swap
10-YR CMT
7.0
Percent
6.0
5.0
4.0
3.0
2.0
1.0
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Oct-06
Sep-06
Aug-06
Jul-06
0.0
Month and Year
If current HECM ARM index policy were available since June 2006, this chart estimates expected rates for monthly adjusting HECMs.
Because LIBOR rates are not available for maturties greater than 1-Yr, the 10-Yr swap rate is used as the LIBOR-equivalent of the 10-Yr
Constant Maturity Treasury rate.
30
How the Secondary Market Securitizes HECM
Net Cash Flow Illustration for a Single HECM Loan
By Year as Percent of Loan's Initial Principal Limit
Assumes Loan Payoff in Year 15
300%
273%
250%
Percent of Initial Principal Limit
200%
150%
Negative amounts are cash advances to borrower -- investor gets
only one large cash inflow at end of loan.
100%
50%
-58%
-7%
-6%
-5%
-5%
-5%
1
2
3
4
5
6
-5%
-5%
-5%
-5%
-4%
-4%
-3%
-2%
10
11
12
13
14
0%
7
8
9
Loan Age in Years
15
-50%
-100%
Source: Stylized Estiimate Based on HUD Data
31
Net Cash Flows on a Hypothetical Pool of HECM Loans
By Year as Percent of Aggregate Initial Principal Limit
Assumes Some Loan Payoffs Occur Each Year In Proportion to Historical Experience
20%
4%
-56%
-2%
1
2
6%
7%
8%
10%
11%
12%
11%
10%
7%
6%
4%
3%
14
15
Percent of Initial Principal Limit
0%
3
4
5
6
7
8
9
10
11
12
13
Loan Age in Years
-20%
Unlike a single HECM loan, cash flows on a pool of
loans turn positive quickly (although there will be
variability if loan payoffs don’t occur as expected.)
-40%
-60%
32
Secondary Market Issues: Termination Speeds
HECM Hazard Rates and Loan Survival Probabilities
All borower ages and types
Hazard Rate
Hazard
Loan
(conditional
Rate Std Survival
termination rate) Error Probablity
0.000
--1.00
0.041
0.000
0.96
0.090
0.001
0.87
0.112
0.001
0.77
0.130
0.001
0.67
0.138
0.002
0.58
0.154
0.002
0.49
0.168
0.003
0.41
0.177
0.003
0.34
0.181
0.004
0.28
0.178
0.005
0.23
0.177
0.006
0.19
0.178
0.007
0.15
0.160
0.009
0.13
0.161
0.012
0.11
0.141
0.016
0.09
0.131
0.024
0.08
0.115
0.038
0.07
0.082
0.058
0.07
HECM Loan Survival Probablities
1.00
Average for All HECM
0.75
Probability
Loan Age
(end of
year)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
0.50
12% CPR (for comparison)
0.25
0 1
2 3
4 5 6
7 8
9 10 11 12 13 14 15 16 17 18
Loan Age (years)
Source: HUD. NOTE: These data define terminations as mortality, move-out, or refinance, but not assignment of the loan to HUD.
33
Secondary Market Issues: HECM Rate Types
HECM Rate Type by Fiscal Year of Endorsement (Beginning 1995)
A. Number of Loans Endorsed
Endorsement
Treasury-Indexed
LIBOR-indexed
Total
Fixed Rate
Fiscal Year
Annually Adjustable Monthly Adjustable Annually Adjustable Monthly Adjustable
Endorsements
1995
3,921
195
50
4,166
1996
3,032
551
13
3,596
1997
2,453
2,745
9
5,207
1998
1,490
6,400
5
7,895
1999
631
7,214
78
7,923
2000
324
6,301
12
6,637
2001
173
7,610
6
7,789
2002
363
12,684
2
13,049
2003
908
17,172
4
18,084
2004
1,970
35,786
34
37,790
2005
347
42,690
45
43,082
2006
202
76,060
20
76,282
2007
105
107,134
129
107,368
2008
189
102,082
57
6,988
2,698
112,014
2009 (part)
20
8,764
3
1,194
167
10,148
Totals
16,128
433,388
60
8,182
3,272
461,030
B. Average Expected Interest Rates
Endorsement
Treasury-Indexed
LIBOR-indexed
Fixed Rate
Fiscal Year
Annually Adjustable Monthly Adjustable Annually Adjustable Monthly Adjustable
1995
8.7
8.4
7.3
1996
8.0
7.6
7.5
1997
8.5
7.8
7.5
1998
8.3
7.1
6.6
1999
7.3
6.3
7.8
2000
8.2
7.2
7.4
2001
7.5
6.5
8.2
2002
6.7
6.2
8.0
2003
5.8
5.3
7.0
2004
6.3
5.7
7.0
2005
7.0
5.7
7.0
2006
7.5
6.0
6.9
2007
7.8
6.0
6.3
2008
6.3
5.4
5.7
5.5
6.2
2009 (part)
6.6
5.5
6.5
5.6
6.6
34
Privately Issued Reverse Mortgage Security –
With Funding Account
Trust
(Special Purpose Entity)
Reverse
Mortgage
Borrowers
Servicer
Two-Way Cash Flows: Advances
Paid to Borrowers and Lump Sum
Repayments When Loans
Terminate
Current Pay
Bonds
$75,000,000
o
Mortgages
$55,000,000
(Aggregate Loan
Balance)
o
Funding
Account
$20,000,000
Payments
to Bond
Holders
Funding Account consists of cash or liquid securities that ensure sufficient cash is available to
pay interest on bonds as well as advance payments to borrowers. Bond rating agencies will
determine funding account size to achieve desired bond rating. Preferred legal vehicle for this
type of security is a REMIC.
35
Privately Issued HECM Securities
 In August 2006, the Mortgage Equity Conversion Asset
Corporation issued the first ever HECM security using the
following collateral as assets


HECM adjustable rate loans with an aggregate balance of
$135.5 million
Plus an $85.5 million funding account comprised of cash and
securities.
 Altogether during 2006 and 2007 there have been about
$2.7 billion in private reverse mortgage securities issued,
of which about $2.2 billion involved HECM collateral, and
the rest conventional reverse loans.
 Due to mortgage market turmoil, no private HECM
securities were issued in 2008
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Ginnie Mae Model for HECM Mortgage
Backed Security
Loan 1
Participations
Borrower 1
Security A
Security B
Security C
Borrower 2
Loan 2
Participations
Servicer
Borrower N
Payment occurs
only when loans
terminate – In this
case Borrower 2
pays off her loan
Servicer distributes
this payment to each
participation that was
created from the loan
Security A
Security C
Security D
Securities
C and D
Security A
$75,000,000 Loan
Participations
Payment to
Investors
Loan N
Participations
Security A
Security B
Security E
Accrual Bond PassThrough Securities
$75,000,000
No Funding Account needed with the Ginnie Mae model because this structure eliminates two way
cash flows. This is possible because (1) the securities are backed by fully-funded loan participations
(pieces of the loans) and (2) bonds accrue interest due if current cash flows are insufficient.
0
Ginnie Mae securities have the full faith and credit backing of the US Government, and use a simple
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pass-through structure with no special purpose entity to hold loans.
Ginnie Mae Continues to Fund HECM During the Credit
Crunch
Securities Issued Between November 2007 and June 2008
 Goldman Sachs (Pool #891088)


$ 117 million
Type Collateral: US Treasury (CMT) -indexed Adjustable Rate HECMs
 Lehman Brothers (Pool #811588)


$220 million
Type Collateral: CMT-indexed Adjustable Rate HECMs
 Financial Freedom (Pool #686712)


$102 million
Type Collateral: Fixed Rate HECMs
 Lehman Brothers (Pool #690041)


$32 million
Type Collateral: Fixed Rate HECMs
 Financial Freedom (Pool #686713)


$75 million
Type Collateral: Fixed Rate HECMs
 Expected Soon: First Ginnie Mae HECM MBS Indexed to LIBOR
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What the Future May Hold – Rising Demand
 According to the 2005 American Housing Survey


17.8 million US homeowners headed by person age 65+
14.8 million are potential HECM borrowers
 12.1 million had no mortgage debt
 2.7 million had mortgage less than 40% of home value
 Between 2005 and 2015 Joint Center for Housing
Studies of Harvard University projects


Owner households ages 62 to 69 will increase by 53%
These are the first of the large post-WWII “baby
boom” generation
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US Population By Age Group
2000 and Projected for 2025
Large Growth Projected in HECM Eligible Age Groups
HECM Minimum Age
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What the Future Holds – Trends in Supply
 Housing and Economic Recovery Act of 2008 established
a higher, national loan limit (ceiling on maximum claim)
for HECM




$417,000 nationwide limit equals the conforming loan limit for
Fannie Mae and Freddie Mac
This limit is indexed to nationwide house price growth, but will
not decline if house prices decline
Gives HECM access to more of the former jumbo market
HUD estimates a 20% increase in volume in 2009 related to the
new limit
 Will the jumbo market return after the current financial
turmoil subsides?


HECM market share had fallen to about 85 to 90% of the
reverse mortgage market in 2006 (before the turmoil)
Return of conventional jumbo market highly dependent on a
source of secondary market financing
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New Directions for the Reverse Mortgage Industry
 Since 2006, we have seen several new variations in
reverse mortgage financing




Fixed Rate HECM (closed end credit) – but are fixed
rates too costly for the consumers?
LIBOR-indexed HECM
Zero closing cost conventional RM
HECM for home purchase (implemented by HUD in
November 2008)
 Possible innovations for the near future


HECM with lower upfront costs (through premium
pricing in secondary market)
HECM upfront premium reduction had been under
consideration but is not likely to happen in 2009 as
housing prices remain soft
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New Directions Continued
 Weathering the Credit Crunch




Keeping HECM sound given falling house prices
Dealing with potential lender financial insolvency
What is needed to effect a return of the non-agency secondary
market?
How will Fannie Mae and Freddie Mac emerge after
conservatorship?
 Expect to see greater link between reverse mortgage products
and the provision of long term health care in the home




Exploding costs of Medicaid as baby boomers age
Use of reverse mortgages can provide better quality care in the
home
Better coordination between reverse mortgage providers and local
aging networks
New products designed to help lower wealth homeowners afford inhome care
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Websites for Reference
 HECM Lender List: http://www.hud.gov/ll/code/llslcrit.cfm
 Reverse Mortgage Calculator (AARP) http://www.rmaarp.com/
 HECM Housing Counselors: http://www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm/
 HECM Processing Handbook:
http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4235.1/index.cfm
 HECM Mortgagee Letters (processing updates):
http://www.hud.gov/offices/hsg/sfh/hecm/hecmml.cfm
 HUD Articles and Research Related to HECM (go to link and type “HECM” into
Find Results with Exact Phrase) : http://www.huduser.org/search/search_site_adv.asp
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