WE’RE HEARING recent reform offers Home Equity Conversion Mortgages more hope.
For a while, things did not look so good for the government product that dominates the reverse mortgage market. As a recent Bank of America Merrill Lynch securitized products research report notes, the Federal Housing Administration had estimated the economic value of the HECM portfolio to be negative $2.8 billion and that just did not bode well for the loans.
The researchers attribute the risks that have arisen in the Home Equity Conversion Mortgage sector to shifts in the reverse mortgage borrower demographic.
“The average age of borrowers has trended lower, and there has been an increased utilization of fixed interest rate mortgages where borrowers draw down all funds at the time of closing.
“A study by the [Consumer Financial Protection Bureau] found that borrowers in their 60s receive the lowest amount of proceeds, and stand to lose the most amount of home equity to compounded interest over a longer number of years. The study also found that borrowers with lower home values are also more likely to take out fixed-rate, lump sum loans than borrowers with higher home values,” they noted.
Reform should mitigate some HECM risks, according to the report by mortgage-backed securities/asset-backed securities strategist Chris Flanagan and mortgage-backed securities strategists Ryan Asato and Justin Borst.
Distribution limits, for example, address Department of Housing and Urban Development analysis showing “risk is proportional to the upfront draw,” the researchers note.
As far as new financial assessment requirements, the researchers say that while these “may cause some borrowers to be rejected,” they believe “the extra level of transparency is a positive for investors.”
Notably, these requirements include provisions that address tax and insurance default concerns which have been among key secondary market concerns and also cited in the departure of some major players from the market such as Wells Fargo.
“Under the lifetime expectancy set-aside option, the lender will set aside an amount…to pay for property charges, which include real estate taxes, hazard insurance and flood insurance only. The borrowers cannot cancel this option if it is required as a condition of the mortgage.
“Additionally, the borrower can grant the lender permission to pay property charges through disbursements from the line of credit or withholdings from monthly disbursements. The borrower can cancel this option at any time.”
Now that reform is moving forward, we will see whether market participants’ hope for the sector in its wake is warranted.
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.