The U.S. HECM Reverse Mortgage Program: How Far We’ve Come and the What the Future May Hold
Presented by Ed Szymanoski US Department of Housing and Urban Development July 2008 The views expressed are those of the author, and not necessarily those of the U.S. Department of Housing and Urban Development.
Topics To Discuss How Far We’ve Come
Overview Managing Risk Loan Level Portfolio Level
Financing Trends
What the Future May Hold
Effect of Falling House Prices Rising Demand Trends in Supply New Products
Websites for Reference 2
How Far We’ve Come - Overview Housing and Community Development Act of 1987 authorized HUD to conduct a demonstration of home equity conversion mortgage for older homeowners (HECM) Business model: private lenders with HUD mortgage insurance Statutory consumer protections
Pre-application counseling (including alternatives to HECM) Guaranteed loan proceeds (if lender insolvency) No excessive referral fees
Details of HECM design left to HUD
Overly prescribed legislation can be an impediment HUD consulted widely with stakeholders during design period
First HECM loan was made in October 1989 3
Money
How Reverse Mortgage Losses Occur Without Mortgage Insurance
Loss
Property Value
Loan Balance Time of Loan Termination
T0
Time
T1
T2
Time at Which Losses Begin
4
Losses Are Smaller and Occur Later if Amount Borrowed is Less
La rge r Loss a t Te rm ina tion with Highe r Loa n Ba la n ce Sm a lle r Loss a t Te rm ina tion with Lowe r
Money
Loa n Ba la nce
Prope rty Va lue
Loa n Ba la nce (highe r)
Loa n Ba la nce (lowe r) Tim e of Te rm ina tion
T0
Time
T1
T2
T3
Times at Which Losses Begin
Conventional (not government insured) reverse mortgage lenders in the US often offer smaller loan amounts to reduce risks. They find it hard to compete with government insured HECM except in the “jumbo� 5 market for homes valued above FHA loan limit of $362,700.
HUD Does not Lend Money: HECM Insures Private Lenders Against Losses Encourages Lenders to Offer Reverse Loans Offers Competitive Limits on Cash Advances Protects Borrowers From Lender Failure to Advance Funds Risk Levels Managed By Limits on Loan Advances to Borrowers Cost of Insurance Paid by Premiums Assessed on All Borrowers 6
HECM Volume (Cases Insured) by Fiscal Year Fiscal Years Run from October 1 to Septem ber 30
Insured through 5/31/08
Projected 6/1/08 to 9/30/08
120,000 110,000 107,367
100,000
80,000
76,282
60,000
43,081 37,790
40,000
18,084
20,000 13,049
-
1,019
3,365
4,166
3,596
389
1,964
157
1990
1991
1992
1993
1994
1995
1996
5,208
1997
7,895
7,923
6,637
7,789
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: HUD data. Projection is linear: 12 times average monthly volume to date for FY 2008.
7
Total HECM Cases Endorsed For Insurance by Fiscal Year of Endorsement Plus Selected Loan and Borrower Characteristics Da ta As of 5/31/2008 Fisca l Ye a r
Count of Ca se s Endorse d
Ex pe cte d Inte re st Ra te *
1990 1991 1992 1993 1994
157 389 1,019 1,964 3,365
9.8 9.3 8.9 7.6 7.6
1995 1996 1997 1998 1999 2000
4,166 3,596 5,208 7,895 7,923 6,637
8.6 6.8 8.1 7.4 6.5 7.3
124.8 117.2 117.5 118.7 131.9 141.7
2001 2002 2003 2004 2005 2006
7,789 13,049 18,084 37,790 43,081 76,282
6.7 6.4 5.4 5.8 5.7 6.0
2007 2008 (pa rt)
107,367 74,122
6.0 5.4
Tota l
419,883
(Oct 1 to Se p 30)
Ave ra ge Prope rty Va lue $
108.7 126.4 124.7 119.7 124.9
Ave ra ge Ma x im um Cla im ** $
84.2 97.5 97.4 97.9 103.8
Ave ra ge Initia l Prin Lim it $
Ave ra ge Borrowe r Age
Ge nde r of Borrowe r(s) Single Single Ma le Couple s*** Fe m a le
Active Insure d Ca se s Ave ra ge Unpa id Count Ba la nce
39.0 43.5 48.6 52.6 58.0
76.7 76.5 76.6 75.7 75.2
57.3% 56.0% 57.7% 55.0% 54.8%
16.6% 13.9% 15.0% 14.3% 14.5%
26.1% 30.1% 27.3% 30.7% 30.8%
3 4 13 36 68
$
105.4 103.3 105.2 107.0 117.8 124.6
54.3 57.3 58.0 64.3 81.6 78.6
76.0 75.9 75.9 75.7 75.3 76.0
56.5% 56.4% 56.6% 56.0% 54.8% 56.8%
13.5% 12.5% 13.2% 14.1% 14.5% 13.0%
30.0% 31.1% 30.2% 29.9% 30.7% 30.2%
171 206 508 1,235 1,601 1,845
102.0 94.3 91.4 84.7 93.5 85.5
167.1 178.0 197.6 219.4 254.9 289.7
140.6 151.3 165.9 182.2 206.0 235.6
97.4 110.0 131.3 133.9 144.4 158.9
75.5 75.1 74.3 74.3 73.8 73.8
54.4% 51.3% 48.6% 48.6% 46.0% 44.5%
13.6% 14.0% 14.2% 15.2% 16.1% 16.7%
31.9% 34.7% 37.2% 36.2% 37.9% 38.8%
2,641 5,612 9,977 23,550 33,532 68,910
261.9 241.4
229.3 217.9
155.7 154.8
73.5 73.0
44.6% 43.7%
18.2% 19.9%
37.2% 36.3%
104,286 73,132
95.3 100.3 117.5 118.4 128.8 132.6 118.0 106.7
46.6%
16.9%
36.5%
327,330
$
107.2 106.7 119.6 103.4 104.6
118.7
Prepared by HUD PD&R 6/13/2008
Tota l Outsta nding Principa l Ba la nce :
$38.8 Billion
Dollar am ounts in thousands Active cases are endorsed for insurance and neither term inated (paid in full or claim term ination) nor assigned to HUD
* Expected Interest Rate for Treasury-Indexed HECM is the 10-Yr constant m aturity treasury rate at closing plus lender m argin. For LIBOR-indexed HECM it is the 10-Yr US dollar denom inated LIBOR sw ap rate plus m argin.
** "M axim um Claim " on a HECM loan = lesser of Property V alue or FHA loan lim it for locality *** Includes all cases w ith m ore than one borrow er irrespective of gender. Age is reported as that of youngest co-borrow er.
8
Age of HECM Borrowers at Origination 25000
15000 10000 5000
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
0 62
Number of Loans
20000
Origination Age
9
How Far We’ve Come - Managing Risk Loan Level Risk: Concept of Principal Limit Principal Limit Factor Times Adjusted Property Value (Maximum Claim Amount) Sets Each HECM Loan’s Principal Limit o o
Factor is Like a Maximum Loan-to-Value Ratio Contains Imbedded Actuarial Assumptions - Loan Termination Rates (mortality and move-out) - House Price Appreciation (mean and variance)
o o
Factor Varies by Interest Rate and Borrower Age Principal Limit Factors were Designed to Break-Even
Principal Limit Controls the Amounts and Timing of Cash Advances on a HECM o
o
Net Present Value of All Cash Advances Must Not Exceed the Principal Limit Once Borrower Reaches Principal Limit, No More Cash Advances 10
HECM Insurance Model Set Actuarial Assumptions
House Price Growth Mortality/Moveout Expected Interest Rates
Set Premium Structure 2% Max. Claim Upfront 0.5% Annually on Balance
Solve For Factors Such That Expected Revenues = Expected Losses
11
HECM Principal Limit Factors for Selected Ages and Interest Rates
Interest Rate *
Age of Borrower at Loan Origination 65 75 85 0.489
0.609
0.738
8.5%
0.369
0.503
0.660
10.0%
0.280
0.416
0.589
* Expected Rate ( 10-Year Treasury Rate + Lender's Margin)
Factor decreases with interest rate
7.0%
Factor increases with age
12
How Principal Limit Factors Determine Payment Limits 75 Year Old Borrow er and 7 Percent Expected Interest Rate
Appraised Value & Maximum Claim Times Principal Limit Factor
$
100,000.00 0.609
Initial Principal Limit
60,900.00
Less: Upfront Premium Loan Closing Costs Servicing Fee Set Aside Initial Cash to Borrower
(2,000.00) (3,000.00) (4,084.96) (1,815.04)
Net Principal Limit
50,000.00
Maximum Monthly Tenure Payment
367.20
(Without a line of credit)
Maximum Line of Credit
50,000.00
(Without monthly payments) 13
Most HECMs Terminate Without a Claim
$
Property Value
Maximum Claim Amt
Loan Balance
Time of Termination
Time
14
Some HECMs Will Terminate With A Claim (Shortfall From Sale of Property) Before Assignment $
lue
a yV
rt
e op Pr Maximum Claim Amt
Loan Balance
Claim
Time of Termination
Time
15
Assignment to HUD If Loan Balance Reaches Maximum Claim HUD/FHA Pays Claim for Full Loan Balance and Recovers Future Loan Balance or Net Proceeds From Property Sale, if Less, at Time of Termination
$
Property Value
Maximum Claim Amt
Loan Balance
HUD Recovery HUD Pays Claim
Time
Time of Assignment
Time of Termination
16
HECM Risk Management – Portfolio Level HECM Demonstration Period (1989 - 1998)
Originally limited to a small pilot or demonstration program Mandated reports to US Congress included actuarial reviews
Permanent HUD Program (1998 – present)
Subject to same portfolio risk management requirements as HUD’s other credit guaranty programs pursuant to Chief Financial Officers Act Credit Reform Act Other laws and guidances
Annual estimates of remaining liability for existing portfolio Annual estimates of Credit Subsidy Rate for future cohorts
17
Stylized HECM Liability Analysis Actual to Date Plus Future Cash Flows Negative Liability Entries Represent Net Inflows
Pre m ium s Cohort Ye a r 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total
Insura nce Endorse m e nts
Upfront Pre m ium s
$13.2 $37.8 $98.7 $190.8 $346.7 $433.3 $367.2 $535.9 $830.3 $929.8 $825.9 $1,089.7 $1,971.9 $3,001.5 $6,884.8 $8,878.1 $17,047.3 $43,482.8
($0.3) ($0.8) ($2.0) ($3.8) ($6.9) ($8.7) ($7.3) ($10.7) ($16.6) ($18.6) ($16.5) ($21.8) ($39.4) ($60.0) ($137.6) ($173.9) ($321.0) ($846.1)
Cla im s
Annua l Pre m ium s ($0.2) ($0.5) ($1.5) ($3.3) ($6.5) ($6.3) ($6.1) ($8.0) ($14.0) ($18.2) ($12.2) ($19.2) ($38.6) ($69.4) ($164.0) ($212.5) ($394.8) ($975.3)
Pre Assignm e nt Cla im * $0.0 $0.2 $0.7 $1.1 $2.1 $2.0 $1.5 $2.0 $3.7 $3.1 $2.2 $3.3 $6.5 $13.5 $32.3 $43.8 $81.6 $199.5
Assignm e nt Cla im ** $0.9 $2.5 $8.7 $22.3 $42.7 $37.7 $34.9 $40.4 $46.3 $69.4 $32.7 $63.2 $162.0 $433.2 $1,152.5 $1,798.0 $3,585.1 $7,532.5
Note Holding $0.1 $0.1 $0.4 $1.1 $2.3 $2.1 $2.2 $2.6 $3.0 $5.4 $2.4 $5.7 $16.9 $55.2 $142.3 $214.8 $429.8 $886.5
Re cove ry ($0.8) ($2.4) ($7.5) ($19.9) ($35.8) ($27.8) ($26.0) ($29.5) ($36.4) ($57.8) ($28.2) ($60.1) ($157.7) ($425.3) ($1,171.7) ($1,757.9) ($3,599.5) ($7,444.1)
Ne t Lia bility ($0.2) ($0.9) ($1.2) ($2.5) ($2.1) ($0.9) ($0.8) ($3.1) ($14.2) ($16.7) ($19.6) ($28.9) ($50.3) ($52.8) ($146.3) ($87.6) ($218.9) ($647.0)
* Pre-assignment claim is loss after sale ** Assignment Claim is full loan balance. Stylized data are similar but not equal to actual HUD estimates. Dollars in Millions
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Credit Reform Act of 1990
Subsidy cost for federal loan programs (direct loans and guarantees) must be fully budgeted in the year in which the loan is made
Eliminates prior practice of yearly cash budgeting which often deferred long term loan costs to future budget years
Subsidy cost is net present value (NPV) of cash flows to and from the government (except administrative expenses) associated with the loan or guarantee over the full term of the loan
Positive subsidy requires Congressional appropriation prior to loan commitment
Negative subsidy represents receipts to government
Administrative costs are budgeted separately on a cash basis19
HECM Has Consistently Operated with “Negative” Credit Subsidy Negative subsidy means NPV of expected revenues exceeds NPV of expected costs HECM subsidy rate projected for FY2008 is negative 1.68% How to reconcile with break-even pricing model:
Current Economic Forecast Different Actual Program Experience Different from Assumptions
HUD operates other credit guaranty programs with negative subsidy rates
Prevent rate from going positive due to small economic shifts Maintains stability of program’s features 20
How Far We’ve Come – Financing HECM Lenders prefer not to hold HECM loans on balance sheet
Depository lenders: Difficult to manage capital requirements while holding illiquid assets Non-depository lenders (mortgage banks): only structured to warehouse mortgages
Until 2006 HECM loans were sold to a single investor: Fannie Mae (a government sponsored enterprise)
Fannie Mae has ability to hold HECM in portfolio Fannie Mae participation was a critical factor in success of HECM However, single investor is not a competitive market 21
Benefits of Secondary Market for Reverse Mortgages Broaden lender distribution channels Expand investor base Achieve full market potential Product innovation Reduced borrowing costs
22
Secondary Market Developments Challenges to Securitizing A Reverse Mortgage Compared to Traditional “Forward” Mortgage
Two-way flows of cash Cash inflows only upon loan termination – difficult to structure current pay bonds
Despite challenges, first US reverse mortgage structured security issued in 1999 (using conventional loans) First HECM-backed security issued in 2006 In 2007 Ginnie Mae announced its HECM MBS program In 2007 HUD permits HECM adjustable interest rates to be indexed to LIBOR (in addition to US Treasury) to increase investor demand
Note: Ginnie Mae is the Government National Mortgage Association – an agency within HUD
23
Net Cash Flow Illustration for a Single HECM Loan By Year as Percent of Loan's Initial Principal Limit Assumes Loan Payoff in Year 15 288%
300%
250%
Percent of Initial Principal Limit
200%
150%
100%
50% -58%
-7%
-6%
-5%
-5%
-5%
1
2
3
4
5
6
-5%
-5%
-5%
-5%
-4%
-4%
-3%
-2%
7
8
9
10
11
12
13
14
0% 15
Loa n Age in Ye a rs -50%
-100% Sourc e: Sty liz ed Es tiimate Bas ed on HUD Data
24
Net Cash Flows on a Hypothetical Pool of HECM Loans By Year as Percent of Aggregate Initial Principal Limit Assumes Some Loan Payoffs Occur Each Year In Proportion to Historical Experience 20%
5% -56%
-2%
1
2
6%
8%
8%
10%
11%
12%
11%
10% 8%
6% 4%
3%
14
15
Percent of Initial Principal Limit
0% 3
4
5
6
7
8
9
10
11
12
13
Loa n Age in Ye a rs
-20%
-40%
Unlike a single HECM loan, cash flows on a pool of loans turn positive quickly (although there will be variability about the expectation.)
-60%
25
Privately Issued Reverse Mortgage Security – With Funding Account
Trust (Special Purpose Entity)
Reverse Mortgage Borrowers
Current Pay Bonds $75,000,000
Mortgages $5 5,000,000 (Aggregate Loan Balance )
Servicer
o
Cash Advances and Lump Sum Repayments
o
Funding Account $2 0,000,000
Payments to Bond Holders
Funding Account consists of cash or liquid securities that ensure sufficient cash is available to pay interest on bonds as well as advance payments to borrowers. Bond rating agencies will determine funding account size to achieve desired bond rating. Preferred legal vehicle for this type of security is a REMIC. 26
Privately Issued HECM Securities In August 2006, the Mortgage Equity Conversion Asset Corporation issued the first ever HECM security using the following collateral as assets
HECM adjustable rate loans with an aggregate balance of $135.5 million Plus an $85.5 million funding account comprised of cash and securities.
Altogether during 2006 and 2007 there have been about $2.7 billion in private reverse mortgage securities issued, of which about $2.2 billion involved HECM collateral, and the rest conventional reverse loans. Due to mortgage market turmoil, no private HECM securities were issued in 2008 27
Ginnie Mae Model for HECM Mortgage Backed Security Loan 1 Participations Security A Security B Security C
Loan 2 Participations Borrowers
Final payment at Maturity event
Servicer Security A Security C Security D Servicer posts payment to each loan participation on a Pari passu basis
Securities B, C, D, E
Security A $75,000,000 Loan Participations
Loan N Participations Security A Security B Security E
Ginnie Mae securities are have the full faith and credit backing of th pass -through structure with no special purpose entity to hold loans.
Accrual Bond Pass Through Scurities $75,000,000
e US Government, and use a simple
No Funding Account needed with the Ginnie Mae model because (1) the securities are backed by fully funded loan participations (future advances to borrowers can be securitized in subsequent issuances) 28 and (2) bonds accrue interest due if current cash flows are insu fficient.
-
0
Ginnie Mae Continues to Fund HECM During the Credit Crunch Securities Issued Between November 2007 and June 2008 Goldman Sachs (Pool #891088)
$ 117 million Type Collateral: US Treasury (CMT) -indexed Adjustable Rate HECMs
Lehman Brothers (Pool #811588)
$220 million Type Collateral: CMT-indexed Adjustable Rate HECMs
Financial Freedom (Pool #686712)
$102 million Type Collateral: Fixed Rate HECMs
Lehman Brothers (Pool #690041)
$32 million Type Collateral: Fixed Rate HECMs
Financial Freedom (Pool #686713)
$75 million Type Collateral: Fixed Rate HECMs
Expected Soon: First Ginnie Mae HECM MBS Indexed to LIBOR 29
What The Future May Hold – Effect Of Falling House Prices Expected Price Declines in 2008-2009 Are Small Compared to Long Run Trend Historical and Forecast US House Price Index Historical
600 500 400 300
Forecast by Global Insight
18 20
16 20
14 20
12 20
10 20
08 20
06 20
04 20
02 20
00 20
98 19
96 19
94 19
19
19
92
200 100 0 90
OFHEO National House Price Index
March 2008 Forecast
Year
30
HECM Solvency is Tied More Closely to Long Run HPI than Traditional Home Purchase Mortgages Home purchase mortgages terminate (default) at much greater rates when short term house prices fall HECM borrowers have no incentive to terminate when prices fall and may “weather the storm� until prices recover HUD is currently analyzing the effect of house price declines on HECM
HUD’s contingent liability will increase Older cohorts will maintain negative net liability Some recent loan cohorts may have positive liability Future cohorts likely to remain sound 31
What the Future May Hold – Rising Demand According to the 2005 American Housing Survey
17.8 million US homeowners headed by person age 65+ 14.8 million are potential HECM borrowers 12.1 million had no mortgage debt 2.7 million had mortgage less than 40% of home value
Between 2005 and 2015 Joint Center for Housing Studies of Harvard University projects
Owner households ages 62 to 69 will increase by 53% These are the first of the large post-WWII “baby boom” generation 32
US Population By Age Group 2000 and Projected for 2025 Large Growth Projected in HECM Eligible Age Groups
HECM Minimum Age
33
What the Future Holds – Trends in Supply Legislation pending to establish a higher, national loan limit for HECM
$550,000 in House version $417,000 in Senate version Either would give HECM access to more of the jumbo market
Fewer options already in jumbo reverse mortgage market
HECM market share has grown from 85% to 95% since credit crunch Financial Freedom announces withdrawal of Cash Account product in June 2008– citing liquidity problems at its parent (Indymac Bank) Estimate only four jumbo lenders left 34
Consolidation in the Industry Major reverse mortgage lenders being purchased by big banks and insurance companies
Bank of America bought Seattle Mortgage Metlife bought Everbank (formerly BNY Mortgage) Is this a result of credit crunch or a longer term trend? Big banks may see opportunity Insurance companies accustomed to actuarially based cash flows
35
What the Future Holds – New Products Since 2006, we have seen several new products to help seniors access home equity
Fixed Rate HECM (closed end credit) LIBOR-indexed HECM Zero closing cost conventional RM Alternatives to reverse mortgages (such as REX Agreement – cash for share of home appreciation)
Likely in the near future
HECM with lower upfront costs HECM for home purchase Reduced principal limit HECM (for borrowers who need less money and want lower costs) 36
New Products Continued Possibilities for consideration in the future (either for HECM or conventional products)
Portable reverse mortgage (allowing transfer to new home) Lifetime income revcrse mortgage (annuity payments continue after move out) Reverse mortgage for seniors with medical conditions (offering higher loan amounts compared to standard products due to lower life expectancy)
Expect to see greater link between reverse mortgage products (of all kinds) and the provision of long term health care in the home
Exploding costs of Medicaid in US as baby boomers age Use of reverse mortgages can provide better quality care in the home Better coordination between reverse mortgage providers and local aging networks
37
Websites for Reference HECM Lender List: http://www.hud.gov/ll/code/llslcrit.cfm Reverse Mortgage Calculator (AARP) http://www.rmaarp.com/ HECM Housing Counselors: http://www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm/ HECM Processing Handbook: http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4235.1/index.cfm HECM Mortgagee Letters (processing updates): http://www.hud.gov/offices/hsg/sfh/hecm/hecmml.cfm HUD Articles and Research Related to HECM (go to link and type “HECM” into Find Results with Exact Phrase) : http://www.huduser.org/search/search_site_adv.asp
38