FHA Reverse Mortgage Volume Down 39%

by Gina Pogol
July 19th, 2010
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FHA’s reverse mortgage program, the Home Equity Conversion Mortgage (HECM) is going through some rough times, thanks to the erosion of home equity and some program changes. You’d think that with 60% to 80% of seniors owning their homes free and clear (depending on which survey you read), rock-bottom low interest rates, the expanding senior population, and the growing trend of lenders foregoing the mortgage origination fee, that business would be booming. But that’s not the case. Here’s why.

HECMs dispenses less money than in the past, while keeping the fees the same. A recent reduction in the principal limit factor of 10% means a lot less bang for your buck. What’s the principal limit factor? The percentage of your home’s value that you can borrow. So, if in the past you could borrow 50% of a $300,000 home’s value (given your age and the current interest rate), you’d now only be able to borrow 45%, or $135,000 instead of $150,000.

Why did this happen? Because the program took some losses recently as home values dove. How can this be, when homeowners may be able to borrow only about half of the property’s value? Two reasons: first, it’s a little-known fact that the average HECM borrower keeps the loan for a little over three years before leaving the home and retiring the loan. Second, in parts of the country, home values fell at a clip of about 30% per year. So, now is prime time for loans taken out at the height of the housing boom to be going away. And these loans are non-recourse, so even if the property securing the reverse mortgage has dropped 60% to 75% in value, and the balance of the loan exceeds the current property value, the borrower walks away freely and the program eats the difference. Say, for example, that a homeowner with a $300,000 home borrowed $150,000. That balance would have grown as the interest accrued was added on. At a 5% rate, that would mean a balance of $174,221 after three years. Meanwhile, the value of the property has fallen by 2/3 to $100,000. The borrower moves from the home and surrenders it to the lender. The program eats $74,221. Repeat this all over the country and you can see how the HECM ran into trouble.

In addition, there may be less need for the money. The curse of a fixed income during inflationary times turns into a blessing in deflationary times. For those who don’t have to worry about unemployment or lost business income, their regular check goes a long way when the economy is in the toilet. There may be less reason to take on a reverse mortgage.

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