Should Government Support HECM Reverse Mortgages?
August 27, 2013

The Home Equity Conversion Mortgage (HECM) program is a Government-supported reverse mortgage program for elderly homeowners. The program allows seniors to take a mortgage on their home under which they can draw funds in a variety of ways – upfront, monthly or intermittently as they choose – with no repayment obligation so long as they reside in their home.  

The HECM program would not exist without Federal Government support. The lenders who advance funds to the seniors are guaranteed repayment by the FHA while virtually all of the HECMs that are written are securitized, with the securities guaranteed by GNMA. In an environment of severe budgetary stringency, a question arises as to whether this program is worthy of Federal Government support? Some legislators think not and several House Republicans have introduced legislation that would kill the program. 

The case for support has five arguments. The first is that the HECM is unique in converting illiquid housing wealth into spendable funds while allowing continued occupancy by the owner. The only close substitute is other reverse mortgage programs, but the private programs that emerged after the HECM program and were modeled after it, disappeared with the financial crisis. This resulted from the collapse of private secondary mortgage markets, upon which the private reverse mortgage programs depended. Hopefully, the market will reemerge at some point to support private programs, but it is not clear when.  

The second argument is that the HECM program generates what economists term “positive externalities”, which are benefits to society that are not enjoyed by the private firms involved in the activity. By providing a facility for converting illiquid housing wealth into spendable funds, the program reduces the burden on public services of various types that are directed toward seniors in need. In addition to Medicaid, these include single purpose loan programs directed toward home repair and property taxes that are offered by many states and municipalities; and a variety of services offered through the Aging Network, such as senior centers, in-home care and nutrition support that are financed by the Federal Government. The argument gains increasing force as the number of homeowners retiring without adequate income increases while their life spans also grow longer. 

The third argument for supporting HECMs is that they offer senior homeowners living primarily off investments insurance against a type of risk that is becoming increasingly important: the risk of outliving their financial assets. They insure against this risk by taking a HECM line of credit when they retire, allowing it to grow over time with market interest rates. The line is tapped in later years if it is needed, otherwise their unused equity reverts to their estate. This kind of insurance is not available in the private market. 

The fourth argument is that a Government program is needed as a model for private programs. The private programs that existed immediately prior to the financial crisis were, indeed, modeled after the HECM program, including numerous safeguards to protect seniors from rapacious lenders. Perhaps the most important of these is the requirement that, prior to any contractual agreement, all borrowers must be counseled by an independent third party not connected to the lender. Without the HECM model, it is very unlikely that such a safeguard would have evolved. 

The fifth argument for supporting the HECM program is that the program is self-funding through the collection of insurance premiums from HECM borrowers. Some would dispute this because a recent actuarial review of the financial status of FHA’s HECM insurance fund showed a deficit. However, estimates of fund value swing around from one year to the next based on forecasts of property values and interest rates, the volume of future business, and changes in program rules. The recent elimination of the standard fixed-rate program, for example, has eliminated the segment of the HECM market that has resulted in the largest losses. 

The critical point is that HUD is mandated to make the program self-supporting, which it can do by manipulating insurance premiums and adjusting program rules to curb transactions that pose excessive risk. On July 30, the Senate passed The Reverse Mortgage Stabilization Act of 2013, which gives HUD additional authority “to improve the fiscal safety and soundness” of the HECM program. 

The arguments for the HECM program are not arguments against having private reverse mortgages available in the market. The best state of affairs would be to have both, as is the case with standard (forward) mortgages. When there is clear evidence that private reverse mortgages are saleable in the secondary market, the maximum HECM loan amount, which was raised after the financial crisis, could be reduced as a way of encouraging a revival of the private market.