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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 36 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 37 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 38 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 39 US Population By Age Group 2000 and Projected for 2025 Large Growth Projected in HECM Eligible Age Groups HECM Minimum Age 40 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 41 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 42 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 43 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 44