HECM study assesses financial impacts of program over 20 years

A study commissioned by the U.S. Department of Housing and Urban Development (HUD) Office of Policy Development and Research (PD&R) in 2022 aimed to assess the state of the Home Equity Conversion Mortgage (HECM) program over a 20-year period.

Released late last year, the study examined three core elements of HECM program effectiveness between 2000 and 2020. It was conducted by analytics firm SP Group LLC and its subcontractor Econometrica Inc.

RMD already examined the study’s sections related to borrower trends and various program policy impacts, but the section on economic impact attempts to assess the value provided to taxpayers, as well as the HECM program’s impacts on the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance (MMI) Fund.

Assessing financial impacts

The researchers assessed the financial impact through the scope of gains and losses over the 20-year period, with data derived from “HUD’s data systems, including mortgage insurance premiums (MIPs), claim payments, note-holding and property-holding expenses, and net recoveries on dispositions for terminated loans,” the report explained.

Determining what constituted “gains” and “losses” was seen through the impact that the program had on the solvency of the MMI Fund. They do not include the administrative costs for the program incurred by HUD, including “the cost of direct and indirect staff, contractors, facilities, data systems, and other resources used in administering the HECM program that are not recorded as program costs.”

Insured loans were looked at through both mortgage insurance premiums and claims, or cash outflows paid to the lender under the FHA insurance program that the HECM program operates from.

“Of the 1.1 million HECM loans endorsed during the 20-year period, the research team identified 533,894 HECM loans that were terminated and disposed as of September 30, 2020, and no further transactions occurring after September 30, 2020,” the report said. “Based on this sample, the research team estimated that FHA incurred a total loss of approximately $10.4 billion, or an average loss of $19,556 per loan.”

Roughly two-thirds of the more than 533,000 loans studied resulted in net gains for the FHA, the report found. The average gain per loan that was terminated without a claim was just over $10,000.

Disposition over time

Loans were also examined on a year-by-year basis, the report stated. It found that, aside from 2007 and 2008, the program ”incurred gains on most of the loans endorsed in each of the other fiscal years.”

The average loss for each loan originated in 2007 was estimated to be $37,300, or a total loss of about $2.5 billion for that cohort of loans. Beginning in 2014, all loans that were terminated with gains reached 92% of the total share — and ultimately reached 100% by 2018, where it has remained despite severely reduced volume, according to the data.

The report also reviewed impacts of alternative disposition methods HUD has used for assigned loans. It characterized the first of the two most common options as the “conveyance program,” which is “used for those HECM loans that are assigned to and foreclosed by HUD and for which the underlying REO is sold through the traditional conveyance program.” The second is the “note sale program,” in which an assigned loan is attached to a vacant property that HUD then sells to a third party through a vacant note sale.

The report aimed to determine the loss severity and overall timeline associated with each option, finding 15,380 loans within the time period disposed of through one of these two methods.

“On a per loan basis, the conveyance program generates a higher cash inflow, but the outflows in that program are almost twice as high as those under the note sale program, resulting in a loss of approximately $142,000 per loan,” the report stated.

When compared by fiscal year of loan endorsement, the report determined that the average loss for each loan “was consistently lower for those disposed through the note sale program,” the report said. “The difference in average loss per year was largest for loans endorsed in fiscal years 2009 and 2010, when losses generated by the loans disposed through the conveyance program were more than twice as high as those generated by the loans disposed through the note sale program ($180,000 versus $80,000).”

Loans sold through the conveyance program had a timeline of approximately two years between initiation and final disposal, and the “average number of months for REO sales stabilized at approximately 37 months” since then, the report said.

Loans sold through the note sale program typically took less time than those through the REO sale channel — save for those loans terminated in 2017, according to the data.

“It does not appear that time to disposition is the primary driver of holding costs, because average holding costs rose from fiscal years 2014 to 2020, whereas the average time to disposition did not fluctuate,” the report explained.

Other findings

The report also found that certain policy changes applied to the HECM program during the study period — including financial assessment and life expectancy set-aside (LESA), “detected that the introduction of the financial assessment, LESA, and underwriting requirement was associated with reduced likelihood of defaults, lower unscheduled draws, and lower net losses to loans made to Black borrowers — although a net loss reduction to the overall population could not be established.”

The study also found that borrowers during this time tended to skew toward the younger end of the senior demographic. This reinforced longstanding data showing that single women use the reverse mortgage program far more than single men — and at rates well beyond the average divisions present in the senior demographic.

Since 2011, roughly half of all borrowers specifying why they sought out a reverse mortgage chose only one reason, while the other half selected multiple reasons. Most of the borrowers who chose one reason (53%) selected “additional income” as their reason for obtaining the loan.

“This finding is in line with the HECM program goal of providing seniors the ability to turn their home equity into supplemental income,” the report stated.

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