A reverse mortgage
is a 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 role of the reverse mortgage is
to put more money in the pockets of seniors by allowing equity depletion
while they are still alive.
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, and by age 62, when they become eligible for a reverse mortgage, loan balances are either paid off or much reduced.
Reverse mortgages, in contrast, consume equity because loan balances rise over time. If there is a balance remaining on a forward mortgage at the time a reverse mortgage is taken out, it is paid off with an advance under the reverse mortgage.
Virtually all of the reverse mortgages written today are insured by FHA under the Home Equity Conversion Mortgage (HECM) program authorized by Congress in 1988. FHA insures the lender against loss in the event the loan balance at termination exceeds the value of the property. It also insures the borrower that any payments due from the lender will be made, even if the lender fails.
The HECM program began slowly, with only 157 loans written in 1990, but by 2000, the number had grown to 6600. 2009 was the peak year with volume reaching 114,000, but then it dropped to 79,000 in 2010 and 73,000 in 2011. The reverse mortgage market seems to have come of age, but the financial crisis has taken its toll.
On the positive side, the reverse mortgage market has not been impacted by the crisis-induced tightening of credit standards that has plagued the market for forward mortgages. It has not been totally shielded from this problem however. Although there have not been any credit requirements for participating in the HECM market, failures to pay property taxes and homeowners insurance were a growing problem in 2012 and will very likely result in eligibility requirements that will be similar to, though much less severe, than those applicable to forward mortgages.
For a time, the HECM program served as a “demonstration”, stimulating the development of private programs. Just before the crisis, I counted 7 such programs. They are now all gone.
The cause was a loss of funding. Private reverse 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 originators of private reverse mortgages had no place to sell them.
The major focus of the private programs had been the high end of the market that the HECM program did not serve well because of FHA loan limits. The private programs had allowed owners of higher-value houses to borrow larger amounts than were possible with a HECM. Their loss left a hole in the market.
Seniors with properties of modest value who, prior to the crisis, were not constrained by FHA loan limits, found their HECM borrowing power reduced. If a house declines in value by 30%, the amount that can be borrowed against it also decline by 30%.
Losses to FHA from insuring HECMs arise when loan balances come to exceed property values. If home prices are rising, as they were until 2006, most HECMs will terminate before this loss point is reached, and FHA’s insurance premiums generate net profits for the Government. The sharp decline in house values since 2006, however, is converting those profits into losses. In response, in September, 2009 HUD announced a 10 percent reduction in the percent of property values that seniors can borrow.
Fannie Mae had been the major source of HECM funding since the program began, but the financial crisis raised doubts about whether this would continue. In September, 2008, the heavy losses suffered by Fannie Mae and Freddie Mac, much of it related to their investments in sub-prime mortgage securities, forced the Government to place the agencies in conservatorship. They are now wards of the Government with a very uncertain future.
To de-emphasize its role and hopefully attract other investors, Fannie Mae in March, 2009 increased its rate margins on adjustable rate HECMs. This shocked many seniors because higher rate margins reduce the amounts they can borrow, and it traumatized many lenders who had to explain the bad news to seniors who had HECMs in process.
To date, no private investors have come forward, but Ginnie Mae, a Federal agency that insures securities issued against FHA and VA forward mortgages, has been filling the gap. It began its program of insuring HECM securities in 2007, and is gradually expanding into the space being vacated by Fannie Mae. In 2012, all HECMs were going into securities guaranteed by Ginnie Mae.
Actions taken by the Congress as part of broader efforts to support the housing market have partly offset the adverse consequences of the financial crisis. In 2008, the system of setting maximum loan amounts on HECMs for each county was replaced by a uniform national limit of $417,000. Early in 2009, the limit was raised temporarily (through 2010) to $625,500. This has helped fill the void left by the loss of private reverse mortgage programs. That limit was later extended into 2012.
In addition, Congress authorized a “HECM for Purchase” program under which seniors could buy a house with a reverse mortgage, and a fixed-rate HECM well-suited for seniors looking to purchase a house. See Can You Buy a House, Then Reverse Mortgage It?