a study commissioned U.S. Department of Housing and Urban Development (HUD) The Office of Policy Development and Research (PD&R) aims to evaluate the status of the Home Equity Conversion Mortgage (HECM) program over a 20-year period in 2022.
The study, released late last year, looked at three core elements of HECM program effectiveness between 2000 and 2020. SP Group LLC and its subcontractors econometrics corp.
RMD has reviewed the portions of the study related to borrower trends and policy impacts of the various programs, but the portion on the economic impact attempts to assess the value provided to taxpayers and the impact of the HECM program on federal housing administration(FHA) Mutual Mortgage Insurance (MMI) Fund.
Assess financial impact
The researchers assessed the financial impact through a profit and loss spread over a 20-year period, using data from HUD’s data system, including mortgage insurance premiums (MIP), claim payments, note holding and property holding expenses, and net of terminated loan dispositions. recovery rate,” the report explains.
The components of “gain” and “loss” are determined through the impact of the plan on the solvency of the MMI fund. They do not include the program’s administrative costs incurred by HUD, including “the costs of direct and indirect employees, contractors, facilities, data systems and other resources used to administer the HECM program but not recorded as program costs.”
Insured loans are looked at through cash outflows paid to the lender through mortgage insurance premiums and claims, or the FHA insurance program operating under the HECM program.
The report states: “Of the 1.1 million HECM loans approved over the 20-year period, the research team identified 533,894 HECM loans that were terminated and disposed of as of September 30, 2020, with no further transactions after September 30, 2020. “Based on this sample, the research team estimates FHA’s total losses to be approximately $10.4 billion, or an average loss per loan of $19,556. “
The report found that about two-thirds of the more than 533,000 loans studied resulted in net benefits to the FHA. The average gain per loan that terminated without a claim was just over $10,000.
Disposition over time
Loans are also reviewed on an annual basis, the report said. The investigation found that the program “earned a majority of loans approved in every financial year except 2007 and 2008.”
The average loss per loan issued in 2007 was estimated at $37,300, for a total loss of approximately $2.5 billion. The data shows that starting in 2014, all loans terminated with proceeds reached 92% of the total share and eventually reached 100% in 2018, where the share has remained despite a significant reduction in volume.
The report also examines the impact of HUD’s use of alternative resolution methods for designated loans. It describes the first of the two most common options as a “transfer plan,” which is “used for HECM loans assigned to HUD and foreclosed by HUD and the underlying REO sold through a traditional transfer plan.” The second is the “note sale program,” in which an allocated loan is attached to a vacant property, which HUD then sells to a third party through a vacant note sale.
The report, which aimed to determine the severity of losses and the overall timeline associated with each option, found that 15,380 loans were disposed of through one of the two methods over the period.
“The transfer program generated higher cash flows on a per-loan basis, but the program’s cash outflow was nearly double that of the note sales program, resulting in a loss of approximately $142,000 per loan,” the report states.
The report determined that average losses per loan “have been consistently lower for loans disposed of through the note sales program” when compared to the fiscal years in which the loans were endorsed, the report said. “The difference in average annual losses for loans endorsed was greatest in fiscal 2009 and 2010, when losses on loans disposed of through the transfer program were more than twice as high as losses on loans disposed of through the note sale program ($180,000 vs. $80,000 Dollar) .”
The time lag between inception and final disposition of loans sold through transfer programs is approximately two years, and since then “the average number of months for REO sales has stabilized at approximately 37 months,” the report said.
Data shows that loans sold through the note sales program generally take less time to sell than through the REO sales channel – except for loans that terminated in 2017.
“Time to disposal does not appear to be the main driver of holding costs, as average holding costs increased from fiscal 2014 to fiscal 2020, while average time to disposal did not fluctuate,” the report explains.
Other findings
The report also found that certain policy changes that applied to HECM plans during the study period – including financial assessments and life expectancy allowances (LESA) – “found that the introduction of financial assessments, LESA and underwriting requirements was associated with a reduction in the likelihood of default on plans, There was a reduction in outbound withdrawals and a reduction in net losses on loans to black borrowers – although it was not possible to determine the reduction in net losses for the overall population.
The study also found that borrowers during this period tended to skew towards younger segments of the older population. This reinforces long-standing data showing that single women use reverse mortgage programs at much higher rates than single men, and at rates well above the average for the older population.
Since 2011, about half of borrowers who stated their reasons for seeking a reverse mortgage chose just one reason, while the other half chose multiple reasons. The majority of borrowers who selected a single reason (53%) selected “extra income” as the reason for obtaining the loan.
“This finding is consistent with the HECM program’s goal of providing seniors with the ability to convert home equity into supplemental income,” the report states.
