Reverse Mortgages
Policy Changes Have Had Mostly Positive Effects on Lenders and Borrowers, but These Changes and Market Developments Have Increased HUD's Risk Gao ID: GAO-09-836 July 30, 2009Reverse mortgages--a type of loan against home equity available to seniors--are growing in popularity. A large majority of reverse mortgages are insured by the Department of Housing and Urban Development (HUD) under its Home Equity Conversion Mortgage (HECM) program. The Housing and Economic Recovery Act of 2008 (HERA) made several modifications to the HECM program, including changes in how origination fees are calculated and an increase in the loan limit. The Act directed GAO to examine (1) how these changes have affected lenders' plans to offer reverse mortgages, (2) how the changes will affect borrowers, and (3) actions HUD has taken to evaluate the financial performance of the HECM program. To address these objectives, GAO surveyed a representative sample of HECM lenders, analyzed loan-level HECM data, and reviewed HUD estimates and analysis of HECM program costs.
On the basis of a survey of HECM lenders, GAO estimates thattaken together, HERA's changes to the HECM loan limit and origination fee calculation have had a positive to neutral influence on most lenders' plans to offer HECMs. Other factors, such as economic and secondary market conditions, have had a mixed influence. Although economic conditions have had a positive influence on about half of lenders' plans to offer HECMS, secondary market conditions have negatively influenced about one-third of lenders. GAO also estimates that the HERA changes have had little to no influence on most lenders' plans to offer non-HECM reverse mortgages. HERA's provisions will affect borrowers in varying ways depending on home value and other factors. The changes to HECM origination fees and loan limits are likely to change the up-front costs and the loan funds available for most new borrowers. GAO's analysis of data on HECM borrowers from 2007 shows that if the HERA changes had been in place at the time, most would have paid less or the same amount in up-front costs, and most would have had more or the same amount of loan funds available. For example, about 46 percent of borrowers would have seen a decrease in up-front costs and an increase in available loan funds. However, 17 percent of borrowers would have seen an increase in up-front costs and a decrease in available loan funds. HUD has enhanced its analysis of HECM program costs, but less favorable house price trends and loan limit increases have increased HUD's risk of losses. HUD has updated its cash flow model for the program and plans to conduct annual actuarial reviews. Although the program historically has not required a subsidy, HUD has estimated that HECMs made in 2010 will require a subsidy of $798 million, largely due to more pessimistic assumptions about long-run home prices. In addition, the higher loan limit enacted by HERA may increase the potential for losses. To calculate the amount of funds available to a borrower, lenders start with a limiting factor of either the home value or, if the home value is greater than the HECM loan limit, with the loan limit. For loans that are limited by the home value, the loan amount and the home value are closer together at the point of origination, which makes it more likely that the loan balance could exceed the home value at the end of the loan. In contrast, for loans that are limited by the HECM loan limit, there is initially a greater difference between the home value and the loan amount, making it less likely that the loan balance will exceed the home value at the end of the loan. The increase in the HECM loan limit may increase HUD's risk of losses by reducing the proportion of loans that are limited by the HECM loan limit.
GAO-09-836, Reverse Mortgages: Policy Changes Have Had Mostly Positive Effects on Lenders and Borrowers, but These Changes and Market Developments Have Increased HUD's Risk
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Developments Have Increased HUD's Risk' which was released on July 30,
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2009:
Reverse Mortgages:
Policy Changes Have Had Mostly Positive Effects on Lenders and
Borrowers, but These Changes and Market Developments Have Increased
HUD's Risk:
GAO-09-836:
GAO Highlights:
Highlights of GAO-09-836, a report to congressional committees.
Why GAO Did This Study:
Reverse mortgages”a type of loan against home equity available to
seniors”are growing in popularity. A large majority of reverse
mortgages are insured by the Department of Housing and Urban
Development (HUD) under its Home Equity Conversion Mortgage (HECM)
program.
The Housing and Economic Recovery Act of 2008 (HERA) made several
modifications to the HECM program, including changes in how origination
fees are calculated and an increase in the loan limit. The Act directed
GAO to examine (1) how these changes have affected lenders‘ plans to
offer reverse mortgages, (2) how the changes will affect borrowers, and
(3) actions HUD has taken to evaluate the financial performance of the
HECM program. To address these objectives, GAO surveyed a
representative sample of HECM lenders, analyzed loan-level HECM data,
and reviewed HUD estimates and analysis of HECM program costs.
What GAO Found:
On the basis of a survey of HECM lenders, GAO estimates that taken
together, HERA‘s changes to the HECM loan limit and origination fee
calculation have had a positive to neutral influence on most lenders‘
plans to offer HECMs. Other factors, such as economic and secondary
market conditions, have had a mixed influence. Although economic
conditions have had a positive influence on about half of lenders‘
plans to offer HECMS, secondary market conditions have negatively
influenced about one-third of lenders. GAO also estimates that the HERA
changes have had little to no influence on most lenders‘ plans to offer
non-HECM reverse mortgages.
HERA‘s provisions will affect borrowers in varying ways depending on
home value and other factors. The changes to HECM origination fees and
loan limits are likely to change the up-front costs and the loan funds
available for most new borrowers. GAO‘s analysis of data on HECM
borrowers from 2007 shows that if the HERA changes had been in place at
the time, most would have paid less or the same amount in up-front
costs, and most would have had more or the same amount of loan funds
available. For example, about 46 percent of borrowers would have seen a
decrease in up-front costs and an increase in available loan funds.
However, 17 percent of borrowers would have seen an increase in up-
front costs and a decrease in available loan funds.
HUD has enhanced its analysis of HECM program costs, but less favorable
house price trends and loan limit increases have increased HUD‘s risk
of losses. HUD has updated its cash flow model for the program and
plans to conduct annual actuarial reviews. Although the program
historically has not required a subsidy, HUD has estimated that HECMs
made in 2010 will require a subsidy of $798 million, largely due to
more pessimistic assumptions about long-run home prices. In addition,
the higher loan limit enacted by HERA may increase the potential for
losses. To calculate the amount of funds available to a borrower,
lenders start with a limiting factor of either the home value or, if
the home value is greater than the HECM loan limit, with the loan
limit. For loans that are limited by the home value, the loan amount
and the home value are closer together at the point of origination,
which makes it more likely that the loan balance could exceed the home
value at the end of the loan. In contrast, for loans that are limited
by the HECM loan limit, there is initially a greater difference between
the home value and the loan amount, making it less likely that the loan
balance will exceed the home value at the end of the loan. The increase
in the HECM loan limit may increase HUD‘s risk of losses by reducing
the proportion of loans that are limited by the HECM loan limit.
What GAO Recommends:
GAO makes no recommendations in this report. HUD concurred with the
report‘s findings.
View [hyperlink, http://www.gao.gov/products/GAO-09-836] or key
components. For more information, contact Mathew J. Scirč at (202) 512-
8678 or sciremj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Most HECM Lenders View the Overall Effect of the HERA Provisions as
Neutral or Positive for Their Reverse Mortgage Business:
HERA Provisions Will Affect Borrower Costs and Loan Amounts Differently
Depending on Home Value and Other Factors:
HUD Has Enhanced Its Analysis of HECM Program Costs but Changes in
House Price Trends and Higher Loan Limits Have Increased HUD's Risk of
Losses:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Impact of Loan Limit Increase in the American Recovery and
Reinvestment Act of 2009 on HECM Lenders:
Appendix III: Effect of the Housing and Economic Recovery Act of 2008
on Up-front Costs for HECM Borrowers:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Change in Up-front Costs for $300,000 Houses in Various
Locations:
Table 2: Survey Population and Sample Dispositions:
Table 3: Universe of 2007 HECMs by Home Value and Maximum Claim Amount
Category:
Figures:
Figure 1: Comparison of 30-Year Forward and Reverse Mortgages:
Figure 2: Number of HECMs Insured Annually, Fiscal Years 1990 through
2008:
Figure 3: Potential Liability of Active HECM Loans, Fiscal Years 2006
through 2008:
Figure 4: Number of HUD-Approved Lenders Originating HECMs, Fiscal
Years 2003 through 2008:
Figure 5: FHA Process to Determine the Maximum Claim Amount and the
Amount of Loan Funds Available:
Figure 6: Influence of HERA's Provisions on Loan Limits and Fees and
Other Factors on Lenders' Plans to Offer HECMs:
Figure 7: Influence of HERA's Provisions on Loan Limits and Fees and
Other Factors on Lenders' Plans to Offer Non-HECM Reverse Mortgages in
2009:
Figure 8: Number of 2007 HECM Borrowers Affected by HERA Provisions:
Figure 9: Average Changes in Maximum Claim Amounts, Up-front Costs, and
Loan Funds Available for 2007 HECM Borrowers:
Figure 10: HECM Credit Subsidy Rates, Fiscal Years 2006 through 2010:
Figure 11: Loan Liability Guarantee for the HECM Program, Fiscal Years
2006 through 2008:
Figure 12: Illustration of How Increasing the HECM Loan Limit Could
Increase HUD's Losses:
Figure 13: Percentage of HECMs with Maximum Claim Amounts Limited by
the Program Limit:
Figure 14: Influence of ARRA's Increase to Loan Limits on Lenders'
Plans to Offer Reverse Mortgages:
Figure 15: Influence of ARRA's Increase to Loan Limits on Consumer
Demand for HECMs:
Figure 16: Changes to Up-front Costs for Borrowers Not Affected by
HERA's Change in Loan Limit:
Figure 17: Changes to Up-front Costs for Borrowers Affected by HERA's
Change in Loan Limit:
Abbreviations:
ARRA: American Recovery and Reinvestment Act of 2009:
CBO: Congressional Budget Office:
FCRA: Federal Credit Reform Act:
FHA: Federal Housing Administration:
GI/SRI: General Insurance and Special Risk Insurance:
HECM: Home Equity Conversion Mortgage:
HERA: Housing and Economic Recovery Act of 2008:
HMBS: HECM Mortgage Backed Security:
HUD: Department of Housing and Urban Development:
LLG: liability for loan guarantees:
MBA: Mortgage Bankers Association:
MMI: Mutual Mortgage Insurance:
NRMLA: National Reverse Mortgage Lenders Association:
OIG: Office of the Inspector General:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 30, 2009:
The Honorable Christopher Dodd:
Chairman:
The Honorable Richard Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
A reverse mortgage is a loan that converts the borrower's home equity
into payments from a lender and typically does not require any
repayment as long as the borrower continues to live in the home.
Available to homeowners aged 62 and older, these loans have become an
increasingly popular financial tool for seniors. Almost all reverse
mortgages are currently made under the Home Equity Conversion Mortgage
(HECM) program administered by the Federal Housing Administration (FHA)
of the Department of Housing and Urban Development (HUD).[Footnote 1]
FHA insures lenders against losses on these mortgages, and charges
borrowers insurance premiums to cover anticipated insurance claims. The
number of HECMs made has grown rapidly in recent years, rising from 157
loans in fiscal year 1990 to more than 112,000 loans in fiscal year
2008.
The Housing and Economic Recovery Act of 2008 (HERA) made several
modifications to the HECM program.[Footnote 2] The first of these
changes affects the origination fees that borrowers pay for these
loans. Prior to HERA, the origination fee was 2 percent of the "maximum
claim amount"--the lesser of the home value or the HECM loan limit.
HERA changed the fee calculation to 2 percent of the maximum claim
amount up to $200,000 plus 1 percent of the maximum claim amount over
$200,000 with a maximum fee of $6,000. In conjunction with this change,
HUD increased the minimum origination fee from $2,000 to $2,500 to
ensure that lenders retain an incentive to continue to serve borrowers
living in lower-valued properties.[Footnote 3] The second of these
changes affects the program's loan limit, the maximum loan amount that
HUD can insure. Specifically, HERA established a national loan limit
for HECMs, which was set at $417,000--a level substantially higher than
the county-based limits that existed prior to HERA.[Footnote 4]
In light of these changes, HERA contains a mandate for GAO to evaluate
the impact of HERA's provisions on the availability of credit under the
HECM program, the cost to borrowers participating in the program, and
the program's financial soundness. As agreed with your offices, this
report examines (1) how HERA's changes to the HECM program and other
factors have affected HECM lenders' planned participation in the
reverse mortgage market, (2) the extent to which HERA's changes to HECM
origination fees and loan limits will affect costs to borrowers and the
loan amounts available to them, and (3) HUD's actions to evaluate the
financial performance of the HECM program, including the potential
impact of loan limit and house price changes.
To address these objectives, we reviewed laws, regulations, and
guidance relevant to the HECM program, including provisions in HERA and
the American Recovery and Reinvestment Act of 2009 (ARRA). We also
spoke with agency, industry, and nonprofit officials, including those
at HUD, Ginnie Mae, Fannie Mae, AARP, the National Reverse Mortgage
Lenders Association (NRMLA), and the Mortgage Bankers Association (MBA)
about the implications of the HERA changes. In addition, to determine
how HERA's provisions have affected lenders' planned participation in
the reverse mortgage market we conducted a survey of a representative
sample of lenders that originated 10 or more HECMs in fiscal year 2008.
The survey included questions about lenders' plans to offer reverse
mortgages, resources dedicated to their HECM business, consumer demand
for HECMs, and margin rates for HECMs. We received responses from 57
percent of the lenders we surveyed. In general, the estimates we made
from our survey results had margins of error of plus or minus 10
percentage points at the 95 percent confidence interval. To determine
the extent to which HERA's changes to HECM origination fees and loan
limits have affected costs to borrowers and the loan amounts available
to them, we reviewed rules for determining borrower costs and loan
amounts. We also obtained and analyzed loan-level data from HUD on HECM
loans and borrowers, which we determined to be reliable for the
purposes of this report. We compared the actual up-front costs and loan
funds available to borrowers who obtained HECMs in 2007 to what their
costs and available loan funds would have been under the HERA
provisions. To examine HUD's actions to evaluate the financial
performance of the HECM program, we reviewed HUD budget estimates,
financial statements, and actuarial reviews for the HECM program, as
well as other analyses the agency has conducted of program costs. We
also reviewed HUD Office of the Inspector General (OIG) audits of FHA's
financial statements. Additionally, we reviewed federal agency
standards for managing credit programs, such as those contained in the
Federal Credit Reform Act (FCRA), related Office of Management and
Budget requirements and instructions, and Federal Accounting Standards
Advisory Board guidance. Finally, we interviewed FHA officials, HUD OIG
officials, industry participants, and mortgage market analysts.
We conducted this performance audit from September 2008 through July
2009, in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. A more
extensive discussion of our scope and methodology appears in appendix
I.
Background:
A reverse mortgage is a loan against the borrower's home that the
borrower does not need to repay for as long as the borrower meets
certain conditions. These conditions, among others, require that
borrowers live in the home, pay property taxes and homeowners'
insurance, maintain the property, and retain the title in the
borrower's name. Reverse mortgages typically are "rising debt, falling
equity" loans, in which the loan balance increases and the home equity
decreases over time. As the borrower receives payments from the lender,
the lender adds the principal and interest to the loan balance,
reducing the homeowner's equity. This is the opposite of what happens
in forward mortgages, which are characterized as "falling debt, rising
equity" loans. With forward mortgages, monthly loan payments made to
the lender add to the borrower's home equity and decrease the loan
balance (see figure 1).
Figure 1: Comparison of 30-Year Forward and Reverse Mortgages:
[Refer to PDF for image: two stacked vertical bar graphs]
Traditional 30-year forward mortgage:
Age of loan in years: 1;
Loan balance (debt): $236,459;
Home equity: $69,541.
Age of loan in years: 2;
Loan balance (debt): $232,737;
Home equity: $79,383.
Age of loan in years: 3;
Loan balance (debt): $228,825;
Home equity: $89.538.
Age of loan in years: 4;
Loan balance (debt): $22,4712;
Home equity: $100,018.
Age of loan in years: 5;
Loan balance (debt): $220,389;
Home equity: $110,835.
Age of loan in years: 6;
Loan balance (debt): $215,845;
Home equity: $122,004.
Age of loan in years: 7;
Loan balance (debt): $211,068;
Home equity: $133,537.
Age of loan in years: 8;
Loan balance (debt): $206,047;
Home equity: $145,451.
Age of loan in years: 9;
Loan balance (debt): $200,769;
Home equity: $157,759.
Age of loan in years: 10;
Loan balance (debt): $195,221;
Home equity: $170,477.
Age of loan in years: 11;
Loan balance (debt): $189,389;
Home equity: $183,623.
Age of loan in years: 12;
Loan balance (debt): $183,259;
Home equity: $197,213.
Age of loan in years: 13;
Loan balance (debt): $176,815;
Home equity: $211,267.
Age of loan in years: 14;
Loan balance (debt): $170,042;
Home equity: $225,802.
Age of loan in years: 15;
Loan balance (debt): $162,922;
Home equity: $240,839.
Age of loan in years: 16;
Loan balance (debt): $155,438;
Home equity: $256,398.
Age of loan in years: 17;
Loan balance (debt): $147,570;
Home equity: $272,502.
Age of loan in years: 18;
Loan balance (debt): $139,301;
Home equity: $289,173.
Age of loan in years: 19;
Loan balance (debt): $130,608;
Home equity: $306,436.
Age of loan in years: 20;
Loan balance (debt): $121,470;
Home equity: $324,314.
Age of loan in years: 21;
Loan balance (debt): $111,865;
Home equity: $342,835.
Age of loan in years: 22;
Loan balance (debt): $101,769;
Home equity: $362,025.
Age of loan in years: 23;
Loan balance (debt): $91,156;
Home equity: $381,914.
Age of loan in years: 24;
Loan balance (debt): $80,000;
Home equity: $402,532.
Age of loan in years: 25;
Loan balance (debt): $68,273;
Home equity: $423,909.
Age of loan in years: 26;
Loan balance (debt): $55,946;
Home equity: $446,079.
Age of loan in years: 27;
Loan balance (debt): $42,989;
Home equity: $469,077.
Age of loan in years: 28;
Loan balance (debt): $29,369;
Home equity: $492,939.
Age of loan in years: 29;
Loan balance (debt): $15,051;
Home equity: $517,702.
Age of loan in years: 30;
Loan balance (debt): $0;
Home equity: $543,409.
Reverse mortgage, over 30 years:
Age of loan in years: 1;
Loan balance (debt): $200,788
Home equity: $83,792
Age of loan in years: 2;
Loan balance (debt): $208,357;
Home equity: $81,915.
Age of loan in years: 3;
Loan balance (debt): $216,194;
Home equity: $79,883.
Age of loan in years: 4;
Loan balance (debt): $224,310;
Home equity: $77,688.
Age of loan in years: 5;
Loan balance (debt): $232,715;
Home equity: $75,324.
Age of loan in years: 6;
Loan balance (debt): $241,419;
Home equity: $72,781.
Age of loan in years: 7;
Loan balance (debt): $250,432;
Home equity: $70,051.
Age of loan in years: 8;
Loan balance (debt): $259,766;
Home equity: $67,127.
Age of loan in years: 9;
Loan balance (debt): $269,432;
Home equity: $63,999.
Age of loan in years: 10;
Loan balance (debt): $279,441;
Home equity: $60,658.
Age of loan in years: 11;
Loan balance (debt): $289,807;
Home equity: $57,094.
Age of loan in years: 12;
Loan balance (debt): $300,542;
Home equity: $53,298.
Age of loan in years: 13;
Loan balance (debt): $311,658;
Home equity: $49,259.
Age of loan in years: 14;
Loan balance (debt): $323,169;
Home equity: $44,965.
Age of loan in years: 15;
Loan balance (debt): $335,090;
Home equity: $40,407.
Age of loan in years: 16;
Loan balance (debt): $347,435;
Home equity: $35,572.
Age of loan in years: 17;
Loan balance (debt): $360,219;
Home equity: $30,448.
Age of loan in years: 18;
Loan balance (debt): $373,458;
Home equity: $25,023.
Age of loan in years: 19;
Loan balance (debt): $387,167;
Home equity: $19,283.
Age of loan in years: 20;
Loan balance (debt): $401,365;
Home equity: $13,215.
Age of loan in years: 21;
Loan balance (debt): $416,067;
Home equity: $6,804.
Age of loan in years: 22;
Loan balance (debt): $431,292;
Home equity: $37.
Age of loan in years: 23;
Loan balance (debt): $447,058;
Home equity: $0.
Age of loan in years: 24;
Loan balance (debt): $463,386;
Home equity: $0.
Age of loan in years: 25;
Loan balance (debt): $480,294;
Home equity: $0.
Age of loan in years: 26;
Loan balance (debt): $497,803;
Home equity: $0.
Age of loan in years: 27;
Loan balance (debt): $515,935;
Home equity: $0.
Age of loan in years: 28;
Loan balance (debt): $534,712;
Home equity: $0.
Age of loan in years: 29;
Loan balance (debt): $554,157;
Home equity: $0.
Age of loan in years: 30;
Loan balance (debt): $574,293;
Home equity: $0.
Source: GAO.
Note: The graphs are based on a starting house value of $300,000, with
an annual 2 percent home appreciation rate. The interest rates are
assumed to be fixed at 5 percent for the forward mortgage and 3 percent
for the reverse mortgage.
[End of figure]
There are two primary types of reverse mortgages, HECMs and proprietary
reverse mortgages. The Housing and Community Development Act of 1987
(P.L. 100-242) authorized HUD to insure reverse mortgages and
established the HECM program. According to industry officials, HECMs
account for more than 90 percent of the market for reverse mortgages.
Homeowners aged 62 or older with a significant amount of home equity
are eligible, as long as they live in the house as the principal
residence, are not delinquent on any federal debt, and live in a single-
family residence. If the borrower has any remaining balance on a
forward mortgage, this generally must be paid off first (typically,
taken up-front from the reverse mortgage). In addition, the condition
of the house must meet HUD's minimum property standards, but a portion
of the HECM can be set aside for required repairs. The borrower makes
no monthly payments, and there are no income or credit requirements to
qualify for the mortgage. Lenders have offered non-HECM, or
proprietary, reverse mortgages in the past, but these products have
largely disappeared from the marketplace due, in part, to the lack of a
secondary market for these mortgages. Typically, proprietary reverse
mortgages have had higher loan limits than HECMs but paid out a lower
percentage of the home value to borrowers.
The volume of HECMs made annually has grown from 157 loans in fiscal
year 1990 to more than 112,000 loans in fiscal year 2008. The HECM
program has experienced substantial growth, as the number of HECMs
insured by FHA has nearly tripled since 2005 (see figure 2).
Figure 2: Number of HECMs Insured Annually, Fiscal Years 1990 through
2008:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 1990;
HECMS: 157.
Fiscal year: 1991;
HECMS: 388.
Fiscal year: 1992;
HECMS: 1,014.
Fiscal year: 1993;
HECMS: 1,950.
Fiscal year: 1994;
HECMS: 3,338.
Fiscal year: 1995;
HECMS: 4,115.
Fiscal year: 1996;
HECMS: 3,558.
Fiscal year: 1997;
HECMS: 5,102.
Fiscal year: 1998;
HECMS: 7,784.
Fiscal year: 1999;
HECMS: 7,896.
Fiscal year: 2000;
HECMS: 6,626.
Fiscal year: 2001;
HECMS: 7,757.
Fiscal year: 2002;
HECMS: 13,029.
Fiscal year: 2003;
HECMS: 18,089.
Fiscal year: 2004;
HECMS: 37,783.
Fiscal year: 2005;
HECMS: 43,040.
Fiscal year: 2006;
HECMS: 76,179.
Fiscal year: 2007;
HECMS: 107,477.
Fiscal year: 2008;
HECMS: 112,150.
Source: GAO analysis of HECM data.
[End of figure]
Additionally, the potential liability of loans insured by FHA has
doubled in the last 2 years (see figure 3). The potential liability is
the sum of the maximum claim amounts for all active HECMs since the
program's inception.
Figure 3: Potential Liability of Active HECM Loans, Fiscal Years 2006
through 2008:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2006;
Potential liability: $35.9 billion.
Fiscal year: 2007;
Potential liability: $56.7 billion.
Fiscal year: 2008;
Potential liability: $77.7 billion.
Source: GAO analysis of FHA‘s financial statements (2006 through 2008).
[End of figure]
Finally, recent years have seen a rapid increase in the number of
lenders participating in the HECM program (see figure 4). However, the
bulk of HECM business is concentrated among a relatively small
percentage of lenders. In fiscal year 2008, roughly 80 percent of all
HECMs were originated by fewer than 300 lenders, or about 10 percent of
HECM lenders.
Figure 4: Number of HUD-Approved Lenders Originating HECMs, Fiscal
Years 2003 through 2008:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2003;
Lenders: 237.
Fiscal year: 2004;
Lenders: 423.
Fiscal year: 2005;
Lenders: 622.
Fiscal year: 2006;
Lenders: 893.
Fiscal year: 2007;
Lenders: 1,480.
Fiscal year: 2008;
Lenders: 2,780.
Source: GAO analysis of HECM data.
[End of figure]
Lenders can participate in the HECM market through wholesale or retail
channels. Wholesale lenders fund loans originated by other entities,
including mortgage brokers and loan correspondents. Retail lenders
originate, underwrite, and close loans without reliance on brokers or
loan correspondents. Most lenders participate in the HECM market
through retail lending, although some participate through the wholesale
process, and a few have both a retail and wholesale HECM business.
There is a secondary market for HECMs, as most lenders prefer not to
hold the loans on their balance sheets. Fannie Mae has purchased 90
percent of HECM loans and holds them in its portfolio. In 2007, Ginnie
Mae developed and implemented a HECM Mortgage Backed Security product,
in which Ginnie Mae-approved issuers pool and securitize a small
proportion of HECMs. Fannie Mae and Ginnie Mae's involvement in the
HECM secondary market helps to provide liquidity so that lenders can
continue offering HECM loans to seniors.
The amount of loan funds available to the borrower is determined by
several factors (see figure 5).
* First, the loan amount is based on the "maximum claim amount," which
is the highest sum that HUD will pay to a lender for an insurance claim
on a particular property. It is determined by the lesser of the
appraised home value or the HECM loan limit. In the past year, Congress
has raised the HUD loan limit for HECMs twice: HERA established for the
first time a national limit for HECMs, which was set at $417,000. As a
result of ARRA, the national limit was raised again to $625,500 through
December 31, 2009. Prior to HERA, the loan limit for HECMs varied by
location and generally were set at 95 percent of the local area median
house price.
* Second, to manage its insurance risk, HUD limits the loan funds
available to the borrower by applying a "principal limit factor" to the
maximum claim amount.[Footnote 5] HUD developed a principal limit
factor table using assumptions about loan termination rates--which are
influenced by borrower mortality and move-out rates--and long-term
house price appreciation rates, and indexed the table by (1) the
borrower's age and (2) the expected interest rate--the 10-Year Treasury
rate plus the lender's margin. The lender determines which factor to
use by inputting the borrower's current age and the current interest
rate information. The older the borrower, the higher the loan amount;
the greater the expected interest rate of the loan, the smaller the
loan amount.
* Third, the funds available to the borrower are further reduced by a
required servicing fee set-aside and by the up-front costs (which
include a mortgage insurance premium and the origination fee), because
borrowers can choose to finance them. HUD allows lenders to charge up
to $35 as a monthly HECM servicing fee. The lender calculates the
servicing fee set-aside by determining the total net present value of
the monthly charged servicing fees that the borrower would pay between
loan origination and when the borrower reaches age 100.[Footnote 6] The
set-aside limits the loan funds available but is not added to the loan
balance at origination. If borrowers choose to finance up-front costs
as part of the loan, the loan funds available are reduced by these
costs.
Figure 5: FHA Process to Determine the Maximum Claim Amount and the
Amount of Loan Funds Available:
[Refer to PDF for image: illustration]
Maximum claim amount (lesser value of FHA loan limit or house value);
times:
Principal limit factor (Borrower‘s age; 10 yr. Treasury rate + lender
margin);
equals:
Loan amount;
minus the combination of:
Up-front costs (Up-front mortgage insurance premium + origination fee)
plus Servicing fee set aside;
equals:
Loan funds available.
Source: GAO.
[End of figure]
Borrowers incur various costs when obtaining a HECM. HUD allows
borrowers to finance both up-front and long-term costs through the
loan, which means they are added to the loan balance.
* Origination fee: Prior to HERA, HECM borrowers were charged an
origination fee equal to 2 percent of the maximum claim amount with a
minimum fee of $2,000. Since the implementation of HERA, HECM borrowers
are charged an origination fee calculated as 2 percent of the maximum
claim amount up to $200,000 plus 1 percent of the maximum claim amount
over $200,000, with a maximum fee of $6,000 and a minimum fee of
$2,500.
* Mortgage insurance premium: Borrowers are charged an up-front
mortgage insurance premium equal to 2 percent of the maximum claim
amount. While the maximum claim amount is always higher than the
initial amount a borrower can receive in HECM payments from the lender,
FHA charges the mortgage insurance premium based on this amount because
the loan balance (with accumulated interest and fees) could exceed the
amount a borrower receives in payments and potentially reach the
maximum claim amount. Additionally, borrowers are charged a monthly
mortgage insurance premium on their loan balance at an annual rate of
0.5 percent.
* Interest: Borrowers are charged interest, which generally includes a
base interest rate plus a fixed lender margin rate, on the loan
balance. Lenders can offer HECMs with fixed, annually adjustable, or
monthly adjustable base interest rates. The adjustable rates can be
tied to either the 1-Year Constant Maturity Treasury Rate or 1-Year
London Interbank Offered Rate Index. Most HECMs have adjustable
interest rates.
* HECM counseling fee: The HECM program requires prospective borrowers
to receive counseling to ensure an understanding of the loan. HUD
allows counseling providers to charge borrowers up to $125 for HECM
counseling.
* Loan servicing fee: Borrowers pay a monthly servicing fee of up to
$35.
* Closing costs: HECMs also have other up-front closing costs, such as
appraisal and title search fees.
FHA's insurance for HECMs protects borrowers and lenders in four ways.
First, lenders can provide borrowers with higher loan amounts than they
could without the insurance. Second, when the borrower is required to
repay the loan to the lender, if the proceeds from the sale of the home
do not cover the loan balance, FHA will pay the lender the difference.
Third, if the lender is unable to make payments to the borrower, FHA
will assume responsibility for making these payments. Fourth, if the
loan balance reaches 98 percent of the maximum claim amount, the lender
may assign the loan to FHA and FHA will continue making payments to the
borrower if the borrower has remaining funds in a line of credit or
still is receiving monthly payments. To cover expected insurance
claims, FHA charges borrowers insurance premiums, which go into an
insurance fund. HECM loans originated since the inception of the
program through 2008 are supported by FHA's General Insurance and
Special Risk Insurance Fund, which includes a number of FHA mortgage
insurance programs for single-family and multifamily housing and
hospitals. Pursuant to HERA, FHA moved the HECM program and other
insurance programs for single-family housing into FHA's Mutual Mortgage
Insurance Fund.
FCRA requires federal agencies that provide loan guarantees to estimate
the expected cost of programs by estimating their future performance
and reporting the costs to the government in their annual budgets.
[Footnote 7] Under credit reform procedures, the cost of loan
guarantees, such as mortgage insurance, is the net present value of all
expected cash flows, excluding administrative costs. This is known as
the credit subsidy cost. For loan guarantees, cash inflows consist
primarily of fees and premiums charged to insured borrowers and
recoveries on assets, and cash outflows consist mostly of payments to
lenders to cover the cost of claims. Annually, agencies estimate credit
subsidy costs by cohort, or all the loans the agency is committing to
guarantee in a given fiscal year. The credit subsidy cost can be
expressed as a rate. For example, if an agency commits to guarantee
loans totaling $1 million and has estimated that the present value of
cash outflows will exceed the present value of cash inflows by $15,000,
the estimated credit subsidy rate is 1.5 percent. When estimated cash
inflows exceed estimated cash outflows, the program is said to have a
negative credit subsidy rate. When estimated cash outflows exceed
estimated cash inflows, the program is said to have a positive credit
subsidy rate--and therefore requires appropriations.
Generally, agencies are required to produce annual updates of their
subsidy estimates--known as re-estimates--of each cohort based on
information about the actual performance and estimated changes in
future loan performance. This requirement reflects the fact that
estimates of subsidy costs can change over time. Beyond changes in
estimation methodology, each additional year provides more historical
data on loan performance that may influence estimates of the amount and
timing of future claims. Economic assumptions also can change from one
year to the next, including assumptions on home prices and interest
rates. FCRA recognized the difficulty of making subsidy cost estimates
that mirrored actual loan performance and provides permanent and
indefinite budget authority for re-estimates that reflect increased
program costs.
Most HECM Lenders View the Overall Effect of the HERA Provisions as
Neutral or Positive for Their Reverse Mortgage Business:
In combination, HERA's changes to the HECM loan limit and origination
fee calculation have had a positive to neutral influence on most
lenders' plans to start or continue offering HECMs. Other factors have
had varying influences on lenders' planned participation. Current
economic conditions have had a moderate upward influence on lenders'
plans; however, secondary market conditions have had a downward
influence on about one-third of lenders' plans to start or continue
offering HECMs. Finally, the HERA changes have not influenced most
lenders' plans to offer proprietary--non-HECM--products.
HERA's Changes and Other Factors Have Had Varying Effects on Lenders'
Planned Participation in the HECM Market:
HERA's changes to the HECM program have had varying effects on HECM
lenders' planned participation in the HECM market. On the basis of
questionnaire responses from a random sample of HECM lenders, we
estimate that for 50 percent of lenders, the combined effect of these
changes has had an upward influence on their plans to start or continue
to offer HECMs (see figure 6).[Footnote 8] For 42 percent of lenders,
the combination of HERA's changes to the origination fee and loan
limits for the HECM program have had little to no influence on their
plans to offer HECMs, while for 8 percent of lenders, HERA's changes
have had a downward influence. Some industry participants we
interviewed stated that the changes were a good compromise that
benefited borrowers by limiting the origination fee and increasing the
loan limit, thereby increasing the money borrowers could receive from a
HECM. Additionally, officials at NRMLA and MBA said the changes
benefited lenders by making the product more attractive to individuals
with higher-value homes.
Figure 6: Influence of HERA's Provisions on Loan Limits and Fees and
Other Factors on Lenders' Plans to Offer HECMs:
[Refer to PDF for image: illustrated table]
HERA‘s provisions on loan limits and fees:
HERA's changes to the calculation of origination fees;
Moderate or great upward influence: 11%;
Little or no influence: 65%;
Great to moderate downward influence: 22%;
Don‘t know: 2%;
Not applicable: N/A.
HERA's changes to HECM loan limits;
Moderate or great upward influence: 70%;
Little or no influence: 28%;
Great to moderate downward influence: 1%;
Don‘t know: 1%;
Not applicable: N/A.
HERA's changes to both HECM origination fees and loan limits;
Moderate or great upward influence: 50%;
Little or no influence: 42%;
Great to moderate downward influence: 8%;
Don‘t know: 1%;
Not applicable: N/A.
Other factors:
Implementation of the HECM for Purchase program;
Moderate or great upward influence: 67%;
Little or no influence: 29%;
Great to moderate downward influence: 1%;
Don‘t know: 2%;
Not applicable: 0.
Current economic conditions;
Moderate or great upward influence: 52%;
Little or no influence: 28%;
Great to moderate downward influence: 19%;
Don‘t know: 0;
Not applicable: 0.
Reduced opportunities in the forward mortgage market;
Moderate or great upward influence: 34%;
Little or no influence: 54%;
Great to moderate downward influence: 8%;
Don‘t know: 0;
Not applicable: 4%.
HERA's prohibition of participation of non-FHA approved entities in the
origination of HECMs;
Moderate or great upward influence: 33%;
Little or no influence: 48%;
Great to moderate downward influence: 13%;
Don‘t know: 4%;
Not applicable: 1%.
Current secondary market options;
Moderate or great upward influence: 14%;
Little or no influence: 50%;
Great to moderate downward influence: 32%;
Don‘t know: 0;
Not applicable: 4%.
Current house price trends;
Moderate or great upward influence: 10%;
Little or no influence: 50%;
Great to moderate downward influence: 38%;
Don‘t know: 1%;
Not applicable: 1%.
HERA's prohibition of lender-funded HECM counseling;
Moderate or great upward influence: 9%;
Little or no influence: 60%;
Great to moderate downward influence: 29%;
Don‘t know: 1%;
Not applicable: 0.
Current availability of wholesale lending partners;
Moderate or great upward influence: 9%;
Little or no influence: 56%;
Great to moderate downward influence: 22%;
Don‘t know: 1%;
Not applicable: 12%.
HERA's restrictions on selling other financial products in conjunction
with HECMs;
Moderate or great upward influence: 5%;
Little or no influence: 78%;
Great to moderate downward influence: 7%;
Don‘t know: 6%;
Not applicable: 4%.
Source: GAO analysis of survey of HECM lenders.
Note: Figure shows estimates based on GAO survey of HECM lenders.
Estimates have margins of error of plus or minus 10 percentage points
or less at the 95 percent confidence interval.
[End of figure]
Taken separately, the two HERA provisions have had differing effects on
lenders' plans to offer HECMs. We estimate that for about 70 percent of
lenders, HERA's increase in HECM loan limits has had an upward
influence on the likelihood of offering HECMs.[Footnote 9] The loan
limit increase has had little to no influence on almost all of the
remaining lenders' plans to offer HECMs. We estimate that 86 percent of
lenders expect that HERA's creation of a single national loan limit of
$417,000 will somewhat or greatly increase consumer demand for HECMs.
Although the increase in the loan limit has generally had an upward
influence on lenders' plans, the change to the calculation of the
origination fee has had a different effect. We estimate that changing
how the fee is calculated has had a downward influence on plans to
offer HECMs for 22 percent of HECM lenders, little to no influence for
65 percent of lenders, and an upward influence for 11 percent of
lenders. Consistent with these views, 65 percent of lenders expect the
change in origination fee to have no effect on consumer demand for
HECMs. An estimated 26 percent of lenders expect the change in the
origination fee to increase consumer demand, while only a few lenders
expect the change to decrease consumer demand.
We estimate that only 2 percent of HECM lenders do not plan to continue
to offer HECMs. Of the respondents in our sample, three lenders
indicated that they did not plan to continue offering HECMs. None of
these were large HECM lenders, as they each originated from 40 to 160
HECMs in fiscal year 2008. Each of these lenders participated in the
HECM market solely through their retail business. These three lenders
varied in the amount of time that they have offered the HECM product. A
representative of one lender indicated that HERA's changes to the loan
limits and origination fee had a great upward influence on the
likelihood that it would offer HECMs, but nonetheless planned to
discontinue offering HECMs. The other two lenders indicated that HERA
and other economic factors had little to no influence on their decision
to discontinue offering HECMs, and one of these lenders noted on the
survey that it had discontinued offering HECMs before the enactment of
the HERA.
As part of our survey, we asked lenders how various economic and
legislative factors influenced their plans to start or continue
offering HECMs. Two factors had an upward influence on most lenders'
plans to offer HECMs in 2009. For an estimated 67 percent of HECM
lenders, the implementation of the HECM for Purchase program
(authorized by HERA) has had an upward influence on their plans to
offer HECMs, and it has had little to no influence on almost all of the
remaining lenders' HECM origination plans.[Footnote 10] Some industry
participants told us that the HECM for Purchase program likely will
make HECMs attractive to a broader range of seniors. Additionally,
current economic conditions have had an upward influence on the plans
to offer HECMs for about 52 percent of lenders. NRMLA officials
explained that seniors are seeking additional revenue because they have
less available income from traditional sources, such as interest and
dividend payments and retirement accounts, which is partially
attributable to poor economic and financial market conditions.
Additionally, two other factors have had an upward influence on some
lenders' plans to offer HECMS. For about one-third of lenders, both (1)
reduced opportunities in the forward mortgage market and (2) HERA's
prohibition on the participation of non-FHA approved entities in the
origination of HECMs has had a moderate or great upward influence on
their plans to offer HECMs.[Footnote 11]
In contrast, three factors had more of a downward influence on some
lenders' planned participation in the HECM market. First, we estimate
from our survey that house price trends have had a downward influence
on the HECM origination plans of 38 percent of lenders; however, house
price trends had little or no influence on plans for about 50 percent
of lenders. Some industry participants told us that the recent decline
in house prices has prevented some seniors from obtaining a HECM either
because they lack the equity in their home to qualify for the loan, or
because they would not receive enough funds from the HECM to have any
cash remaining after they deduct HECM fees and pay off any existing
mortgage debt.
Second, we estimate that the availability of secondary market options
has had a downward influence on the plans of about one-third of lenders
to offer HECMs. The secondary market for HECMs plays an important role
in maintaining availability of loans because lenders prefer not to hold
HECMs on their balance sheets. There are currently two primary options
in the secondary market--Fannie Mae and Ginnie Mae.
* Fannie Mae officials stated that Fannie Mae bought and held more than
90 percent of HECMs in its portfolio in 2008 and was the principal
secondary market purchaser of HECM loans. However, Fannie Mae's
regulator--the Federal Housing Finance Agency--recently required it to
reduce the mortgage assets it holds in portfolio. Fannie Mae officials
told us that as a result, they are making changes to their HECM
business, which will attract other investors to the secondary market
for HECMs, in order to decrease their share of the market. Recently,
Fannie Mae lowered the price it pays lenders for HECMs and implemented
a "live pricing" system that requires lenders to commit to the volume
of HECMs they will sell to Fannie Mae.[Footnote 12] We estimate that
approximately 90 percent of lenders viewed secondary market pricing
requirements and the transition to live pricing as important factors in
recent margin rate increases on HECMs. Fannie officials explained that
as the price they pay lenders for HECMs falls, the margin rate the
lenders charge the consumers generally increases.[Footnote 13] Some
lenders we surveyed noted that margin rate increases stemming from
pricing changes could make HECMs less attractive to borrowers because
they would not be able to obtain as much cash from their HECM.[Footnote
14] Some lenders noted that live pricing complicates their relationship
with borrowers because the interest rate can change between loan
application and closing, which may result in the senior being able to
receive less money from their HECM than originally quoted.
* Ginnie Mae developed and guarantees a HECM Mortgage Backed Security
(HMBS) that aims to expand the availability of HECMs from multiple
lenders, reduce borrowing costs, and create a broader secondary market
for HECM loans. Ginnie Mae officials stated that they were poised to
take on extra volume in the HECM secondary market by guaranteeing
securities issued by lenders. AARP officials noted that Ginnie Mae's
HMBS product could help introduce competition into the secondary market
for reverse mortgages, lowering margin rates for seniors. However,
industry participants point to several issues with the Ginnie Mae
product that could limit its appeal to lenders. First, Ginnie Mae
requires HMBS issuers to buy back the HECM when the loan balance
reaches 98 percent of the loan's maximum claim amount.[Footnote 15]
Second, issuers are required to pay interest shortfalls to investors
when the loan is terminated mid-month. Some HECM lenders have noted
that both of these provisions expose them to extra risk on the loan, as
compared to the alternative of selling the HECM outright as they had
when selling to Fannie Mae.
Third, for an estimated 29 percent of lenders, HERA's prohibition on
lender-funded counseling has had a downward influence on plans to offer
HECMs. Industry participants said that this prohibition is a problem
for the HECM industry because counseling is required for borrowers to
obtain a HECM, but borrower-paid counseling can be a deterrent for
seniors who are still deciding if they want a HECM, or for those who
have limited financial means to pay for counseling. In contrast to
these comments, we estimate that the prohibition on lender-funded
counseling had little or no influence on the plans of 60 percent of
lenders.
Our survey of HECM lenders asked about two other factors--HERA's
restrictions on selling other financial products in conjunction with
HECMs and the current availability of wholesale lending partners--that
could influence lenders' plans to start or continue to offer HECMs. In
general, these factors had little or no influence on lenders' plans
(see figure 6).
HERA Has Not Influenced Most Lenders' Plans to Offer Non-HECM Reverse
Mortgages:
In 2008, several non-HECM reverse mortgages--referred to as jumbo or
proprietary reverse mortgages--were available in the marketplace.
Proprietary reverse mortgages offered loan limits that were greater
than the HECM loan limit. For example, Financial Freedom, a large
reverse mortgage lender, offered a product called the Cash Account
Advantage Plan, which was not subject to the HECM loan limits, and in
some cases provided more cash than a HECM to borrowers with higher-
value homes. Based on our survey results, we estimate that
approximately 43 percent of HECM lenders made non-HECM reverse
mortgages in 2008. However, towards the end of 2008, almost all of the
non-HECM reverse mortgage products were withdrawn from the market due
to the lack of a secondary market to support them. Nonetheless, from
our survey results, we estimate that 36 percent of HECM lenders plan to
offer a non-HECM reverse mortgage in 2009.
We estimate that HERA's changes to the calculation of the origination
fee and loan limit have had little or no influence on 68 percent of
lenders' plans to originate non-HECM reverse mortgages (see figure 7).
However, for an estimated 29 percent of HECM lenders, HERA's change to
the loan limits has had an upward influence on their plans to offer non-
HECM reverse mortgages. Additionally, we estimate that for 32 percent
of lenders, the implementation of the HECM for Purchase program had an
upward influence on their plans to offer these loans. We estimate that
current economic conditions have had an upward influence on plans to
offer non-HECM reverse mortgages for 29 percent of lenders, little to
no influence for 34 percent of lenders, and a downward influence for 17
percent of lenders. Our survey of HECM lenders asked about several
other factors (see figure 7) that could influence lenders' plans to
offer a non-HECM reverse mortgage product in 2009. Generally, these
factors have had little or no influence on lenders' plans. Our survey
results did not indicate that secondary market conditions had a
downward influence on the plans of most lenders. However, several
lenders we interviewed said that while they hoped to offer a non-HECM
reverse mortgage in 2009, their ability to do so would depend on the
availability of funding in the secondary market.
Figure 7: Influence of HERA's Provisions on Loan Limits and Fees and
Other Factors on Lenders' Plans to Offer Non-HECM Reverse Mortgages in
2009:
[Refer to PDF for image: illustrated table]
HERA‘s provisions on loan limits and fees:
HERA's changes to the calculation of origination fees;
Moderate or great upward influence: 9%;
Little or no influence: 74%;
Great to moderate downward influence: 12%;
Don‘t know: 5%;
Not applicable: N/A.
HERA's changes to HECM loan limits;
Moderate or great upward influence: 29%;
Little or no influence: 56%;
Great to moderate downward influence: 10%;
Don‘t know: 6%;
Not applicable: N/A.
HERA's changes to both HECM origination fees and loan limits;
Moderate or great upward influence: 15%;
Little or no influence: 68%;
Great to moderate downward influence: 12%;
Don‘t know: 5%;
Not applicable: N/A.
Other factors:
Implementation of the HECM for Purchase program;
Moderate or great upward influence: 67%;
Little or no influence: 29%;
Great to moderate downward influence: 1%;
Don‘t know: 2%;
Not applicable: 0.
Current economic conditions;
Moderate or great upward influence: 32%;
Little or no influence: 43%;
Great to moderate downward influence: 5%;
Don‘t know: 4%;
Not applicable: 16%.
Current secondary market options;
Moderate or great upward influence: 19%;
Little or no influence: 38%;
Great to moderate downward influence: 22%;
Don‘t know: 5%;
Not applicable: 17%.
Reduced opportunities in the forward mortgage market;
Moderate or great upward influence: 17%;
Little or no influence: 53%;
Great to moderate downward influence: 7%;
Don‘t know: 4%;
Not applicable: 19%.
HERA's prohibition of participation of non-FHA approved entities in the
origination of HECMs;
Moderate or great upward influence: 16%;
Little or no influence: 57%;
Great to moderate downward influence: 6%;
Don‘t know: 5%;
Not applicable: 17%.
Current availability of wholesale lending partners;
Moderate or great upward influence: 14%;
Little or no influence: 45%;
Great to moderate downward influence: 21%;
Don‘t know: 3%;
Not applicable: 16%.
Current house price trends;
Moderate or great upward influence: 12%;
Little or no influence: 45%;
Great to moderate downward influence: 24%;
Don‘t know: 3%;
Not applicable: 16%.
HERA's prohibition of lender-funded HECM counseling;
Moderate or great upward influence: 8%;
Little or no influence: 61%;
Great to moderate downward influence: 12%;
Don‘t know: 4%;
Not applicable: 16%.
HERA's restrictions on selling other financial products in conjunction
with HECMs;
Moderate or great upward influence: 5%;
Little or no influence: 71%;
Great to moderate downward influence: 3%;
Don‘t know: 6%;
Not applicable: 15%.
Source: GAO analysis of survey of HECM lenders.
Note: Figure shows estimates based on GAO survey of HECM lenders.
Estimates have margins of error of plus or minus 10 percentage points
or less at the 95 percent confidence interval.
[End of figure]
HERA Provisions Will Affect Borrower Costs and Loan Amounts Differently
Depending on Home Value and Other Factors:
HERA's provisions will affect borrowers in varying ways depending
primarily on home value and whether HERA's increase in loan limit will
change the maximum claim amount of the loan. HERA's changes to HECM
origination fees and loan limits are likely to change the up-front
costs (origination fee and up-front mortgage insurance premium) and the
loan funds available for most new borrowers. Our analysis of data on
borrowers who took out HECMs in 2007 shows that had the HERA provisions
been in place, most borrowers would have paid less or the same amount
in up-front costs, and most would have had more or the same amount of
loan funds available. Additionally, about 28 percent of HECM borrowers
in 2007 would have seen an increase in maximum claim amount due to
HERA's increase in loan limit, which would have meant more loan funds
available for nearly all of these borrowers. Borrowers also may be
affected by other consequences of the HERA provisions, such as margin
rate increases and changes to funding of HECM counseling.
HERA Provisions Will Change Up-front Costs for Many Borrowers:
The net effect of the HERA provisions on an individual borrower's total
up-front costs depends on house value, the local loan limit prior to
HERA, and the new loan limit. HECM up-front costs consist primarily of
the up-front mortgage insurance premium and the origination fee, both
of which are calculated as a proportion of the maximum claim amount.
Most borrowers are likely to see changes in origination fees due to
HERA. Generally, those with house values greater than the prior HECM
loan limit in their area will see changes in the up-front mortgage
insurance premium.[Footnote 16] Borrowers fall into two categories,
based on whether their maximum claim amount changes:
* Maximum claim amount does not change: For borrowers whose houses are
valued at or less than the prior HECM loan limit in their area, the
maximum claim amount does not change. Therefore, for these borrowers,
the mortgage insurance premium (which is calculated based on the
maximum claim amount) also does not change. However, the origination
fee may change depending on the value of the house. A borrower whose
house is valued at less than $125,000 should expect up to a $500
increase in the up-front costs due to the increase in the minimum
origination fee from $2,000 to $2,500. A borrower whose house is valued
at $125,000 to $200,000 would see no change in the up-front costs
because they would pay the same 2 percent of the maximum claim amount
(the same as before HERA). A borrower whose house is valued at greater
than $200,000 would expect a decrease in up-front costs due to the
decreased origination fee for amounts greater than $200,000 and the fee
cap of $6,000. For an example, see borrower D, whose house value is
$300,000, in table 1.
* Maximum claim amount increases: For borrowers whose maximum claim
amount increases because their house values are greater than the prior
local HECM loan limit, the change to up-front costs is more complex.
All borrowers in this category will pay more in up-front mortgage
insurance premiums because premiums are calculated based on the entire
maximum claim amount. However, some borrowers may pay more in
origination fees, while others will pay less. When combining these two
costs, the total up-front costs could increase, decrease or remain the
same. For example, borrowers A, B, and C in table 1 each own houses
valued at $300,000 that are located in counties in which prior HECM
loan limits varied from $200,000 to $290,000. Each borrower would see
different effects in up-front costs.
See appendix III for a more complete explanation of how up-front costs
will change for borrowers with different characteristics.
Table 1: Change in Up-front Costs for $300,000 Houses in Various
Locations:
Borrower: A;
Prior local HECM loan limit: $200,000; Before HERA;
Maximum claim amount: $200,000;
Up-front mortgage insurance premium: $4,000;
Origination fee: $4,000;
Total up-front costs: $8,000;
Borrower: A;
Prior local HECM loan limit: $200,000; After HERA;
Maximum claim amount: $300,000;
Up-front mortgage insurance premium: $6,000;
Origination fee: $5,000;
Total up-front costs: $11,000;
Change in up-front costs: $3,000 more.
Borrower: B;
Prior local HECM loan limit: $275,000; Before HERA;
Maximum claim amount: $275,000;
Up-front mortgage insurance premium: $5,500;
Origination fee: $5,500;
Total up-front costs: $11,000.
Borrower: B;
Prior local HECM loan limit: $275,000; After HERA;
Maximum claim amount: $300,000;
Up-front mortgage insurance premium: $6,000;
Origination fee: $5,000;
Total up-front costs: $11,000;
Change in up-front costs: No Change.
Borrower: C;
Prior local HECM loan limit: $290,000; Before HERA;
Maximum claim amount: $290,000;
Up-front mortgage insurance premium: $5,800;
Origination fee: $5,800;
Total up-front costs: $11,600.
Borrower: C;
Prior local HECM loan limit: $290,000; After HERA;
Maximum claim amount: $300,000;
Up-front mortgage insurance premium: $6,000;
Origination fee: $5,000;
Total up-front costs: $11,000;
Change in up-front costs: $600 less.
Borrower: D;
Prior local HECM loan limit: $325,000; Before HERA;
Maximum claim amount: $300,000;
Up-front mortgage insurance premium: $6,000;
Origination fee: $6,000;
Total up-front costs: $12,000.
Borrower: D;
Prior local HECM loan limit: $325,000; After HERA;
Maximum claim amount: $300,000;
Up-front mortgage insurance premium: $6,000;
Origination fee: $5,000;
Total up-front costs: $11,000;
Change in up-front costs: $1,000 less.
Source: GAO.
[End of table]
Most 2007 HECM Borrowers Would Have Paid the Same or Less in Up-front
Costs under the HERA Provisions, and Most Borrowers Would Have Had the
Same or More Loan Funds Available:
To illustrate the potential effect of the HERA provisions on borrowers,
we compared the actual maximum claim amounts, up-front costs
(origination fee plus the up-front insurance premium), and loan funds
available for HECM borrowers in 2007 to what their maximum claim
amounts, up-front costs, and loan funds available would have been had
the HERA provisions been in place.[Footnote 17] Overall, we found that
nearly 27 percent of borrowers would have paid more in up-front costs,
46 percent would have paid less, and 27 percent would have paid the
same (see figure 8). The amount and direction of the changes to up-
front costs and loan funds available primarily depended on house value
and whether a borrower would have benefited from an increase in loan
limit (about 28 percent of 2007 HECM borrowers' homes were valued at
more than the prior loan limit and would have seen their maximum claim
amounts increase because of HERA's increase in the loan limit).
Our analysis of up-front costs broken down by its two components is as
follows:
* Origination fees: About 24 percent of 2007 borrowers would have paid
more in origination fees, 49 percent would have paid less, and 27
percent would have paid the same amount. Increases in origination fees
were due either to the $500 increase in the minimum origination fee
(about 17 percent of all borrowers) or to the increased loan limits
(about 6 percent of all borrowers). Borrowers who would have paid less
in origination fees had maximum claim amounts greater than $200,000,
which means they would have benefited from the decrease in the
origination fee for the portion of the maximum claim amount greater
than $200,000, the $6,000 origination fee cap, or both.
* Up-front mortgage insurance premium: Twenty-eight percent of 2007
HECM borrowers would have paid more in up-front mortgage insurance
premiums due to increases in the loan limit, while 72 percent of
borrowers would have paid the same amount, generally because the size
of their loans was limited by the value of their homes and not the HECM
loan limit.[Footnote 18]
Changes in the loan limits and up-front fees would have affected the
loan funds available to most 2007 borrowers. Borrowers whose maximum
claim amount would have increased because of an increase in loan limit
would have paid a higher up-front mortgage insurance premium,
regardless of how much of their available loan funds they chose to
access. Because this analysis assumed that HECM borrowers financed the
up-front costs in the loan, any increase or decrease in the up-front
costs affects the amount of loan funds that are available to them. Our
analysis--which assumes that borrowers financed their up-front costs--
shows that had the HERA provisions been in place at origination for
2007 HECMs, approximately 56 percent of borrowers would have had more
loan funds available, 17 percent would have had less loan funds
available, and 27 percent would have had the same amount available (see
figure 8).
Specifically,
* 28 percent of borrowers would have had more loan funds available,
primarily due to the increase in loan limit;
* about 28 percent of borrowers would have had more loan funds
available due solely to a decrease in their up-front fees;
* 17 percent of borrowers would have had a smaller amount of loan funds
available due solely to an increase in their up-front fees; and:
* 27 percent of borrowers would have experienced no change in the
amount of loan funds available because their up-front fees and loan
limits remained the same.
Figure 8: Number of 2007 HECM Borrowers Affected by HERA Provisions:
[Refer to PDF for image: illustrated table]
Change in up-front costs: Increase;
Change in funds available, increase: 9,761 (10%);
Change in funds available, no change: 0;
Change in funds available, decrease: 17,303 (17%);
Change in funds available, total: 27,064 (27%).
Change in up-front costs: No change;
Change in funds available, increase: 6 (less than 1%);
Change in funds available, no change: 27,548 (27%);
Change in funds available, decrease: 0;
Change in funds available, total: 27,554 (27%).
Change in up-front costs: Decrease;
Change in funds available, increase: 46,862[A] (46%);
Change in funds available, no change: 0;
Change in funds available, decrease: 0;
Change in funds available, total: 46,862 (46%).
Change in up-front costs: Total;
Change in funds available, increase: 56,629 (56%);
Change in funds available, no change: 27,548 (27%);
Change in funds available, decrease: 17,303 (17%);
Change in funds available, total: 101,480 (100%).
Source: GAO.
[A] For 18,847 of these borrowers, the maximum claim amount increased.
For the other 28,015 borrowers, the maximum claim amount remained the
same.
[End of figure]
Additionally, figure 8 shows the number of 2007 borrowers within the
various categories and figure 9 shows the average changes in up-front
costs and loan funds available for each category of borrower. Borrowers
with the largest increases in their maximum claim amounts on average
would have the largest percent increases in up-front costs (see figure
9). Borrowers with no increase in their maximum claim amount, who have
a change to up-front costs, will have a corresponding change in loan
funds available that are equal in size but opposite in direction. For
example a borrower with a $200 decrease in up-front costs will have a
$200 increase in loan funds available and a borrower with a $300
increase in up-front costs will have a $300 decrease in loan funds
available.
Figure 9: Average Changes in Maximum Claim Amounts, Up-front Costs, and
Loan Funds Available for 2007 HECM Borrowers[A]:
[Refer to PDF for image: illustrated table]
Change in up-front costs: Increase;
Change in loan funds available: Increase;
Number of 2007 HECMS: 9,761;
Average original maximum claim amount: $240,008;
Average increase in maximum claim amount: $64,368;
Average difference in up-front costs: $1,508 (11%);
Average difference in loan funds available: $42,560 (28%).
Change in up-front costs: Increase;
Change in loan funds available: Decrease;
Number of 2007 HECMS: 17,303;
Average original maximum claim amount: $90,760;
Average increase in maximum claim amount: 0;
Average difference in up-front costs: $402 (5%);
Average difference in loan funds available: -$402 (-1%).
Change in up-front costs: No change;
Change in loan funds available: Increase;
Number of 2007 HECMS: 6;
Average original maximum claim amount: $260,875;
Average increase in maximum claim amount: $20,292;
Average difference in up-front costs: 0 (0%);
Average difference in loan funds available: $14,232 (8%).
Change in up-front costs: No change;
Change in loan funds available: No change;
Number of 2007 HECMS: 27,548;
Average original maximum claim amount: $162,592;
Average increase in maximum claim amount: 0;
Average difference in up-front costs: 0 (0%);
Average difference in loan funds available: 0 (0%).
Change in up-front costs: Decrease;
Change in loan funds available: Increase;
Number of 2007 HECMS: 18,847[B];
Average original maximum claim amount: $350,401;
Average increase in maximum claim amount: $39,477;
Average difference in up-front costs: -$422 (-2%);
Average difference in loan funds available: $27,883 (12%).
Change in up-front costs: Decrease;
Change in loan funds available: Increase;
Number of 2007 HECMS: 28,015[C];
Average original maximum claim amount: $270,918;
Average increase in maximum claim amount: 0;
Average difference in up-front costs: -$733 (-4%);
Average difference in loan funds available: $733 (less than 1%).
Source: GAO.
[A] This analysis did not include refinanced HECMs, but a separate
analysis of refinanced HECMs showed similar changes in maximum claim
amounts, up-front costs, and loan funds available within the different
categories of borrowers.
[B] For these borrowers, the maximum claim amount increased.
[C] For these borrowers, the maximum claim amount remained the same.
[End of figure]
Borrowers May Be Affected by Other Factors, Such as Lender Margin Rates
and Counseling Fees:
Increased lender margin rates stemming from HERA's change to the
origination fee calculation could reduce loan funds available to
borrowers. At loan origination, the expected interest rate HUD uses to
determine the portion of the maximum claim amount that will be made
available to the borrower includes the 10-year Treasury rate plus the
fixed lender margin rate. Our survey of HECM lenders indicates that
some lenders have raised their margin rates modestly to compensate for
HERA's limitations on the origination fee; however, we did not receive
a sufficient number of responses to reliably estimate the median
increase in margin rate for the population.[Footnote 19] To illustrate
the impact of a modest increase in margin-rate on borrowers, we applied
a 0.25 percentage point increase to borrowers who took out HECMs in
2007. We found that these borrowers would have seen a 3 percent average
decrease in loan funds available as a result of the higher margin rate.
[Footnote 20] A comparison of HUD data on HECMs originated within the
first 3 months of HERA's implementation with data from the same 3
months from the prior year indicates that average margin rates were
higher after HERA but that the overall average HECM expected interest
rates were essentially the same. This outcome resulted from declines in
10-year Treasury rates offsetting increases in lender margin rates.
In addition, more borrowers, as well as prospective borrowers who
ultimately do not obtain a HECM, may need to pay counseling fees.
Provisions in HERA prohibit lenders from paying for this counseling but
allow HUD to use a portion of HECM mortgage insurance premiums for this
purpose. HUD officials said that they have not exercised this authority
because the resulting reduction in premium income would affect the
subsidy rate of the program adversely and potentially require
appropriations. Because HUD did not implement this provision, more
borrowers and prospective borrowers may need to pay counseling fees
themselves. For borrowers who do eventually obtain a HECM, the fee can
be financed in the loan. Prospective borrowers who do not qualify for a
HECM or who choose not to proceed with the loan after counseling may
have to pay for counseling out of pocket. HUD's recent announcement
that it will provide approximately $8 million in grant funds for HECM
counseling in 2009 may mitigate any negative impact the HERA changes
may have on seniors' ability to obtain HECM counseling.
HUD Has Enhanced Its Analysis of HECM Program Costs but Changes in
House Price Trends and Higher Loan Limits Have Increased HUD's Risk of
Losses:
HUD has taken or planned steps to enhance its analysis of the HECM
program's financial performance. However, HUD's recent estimates of
program costs indicate weaker performance than previously estimated,
primarily due to more pessimistic assumptions about long-term house
price trends. Additionally, higher loan limits enacted under HERA and
the American Recovery and Reinvestment Act of 2009 (ARRA) could
increase HUD's financial risk.
HUD Is Taking Steps to Improve its Analysis of the HECM Program's
Financial Performance:
To estimate the cost of the HECM program, HUD uses a model to project
the cash inflows (such as insurance premiums paid by borrowers) and
cash outflows (such as claim payments to lenders) for all loans over
their expected duration. HUD's model is a computer-based spreadsheet
that incorporates assumptions based on historical and projected data to
estimate the amount and timing of insurance claims, subsequent
recoveries from these claims, and premiums and fees paid by borrowers.
These assumptions include estimates of house price appreciation,
interest rates, average loan size, and the growth of unpaid loan
balances. HUD inputs its estimated cash flows into OMB's credit subsidy
calculator, which calculates the present value of the cash flows and
produces the official credit subsidy rate for a particular loan cohort.
A positive credit subsidy rate means that the present value of the
cohort's expected cash outflows is greater than the inflows, and a
negative credit subsidy rate means that the present value of the
cohort's expected cash inflows is greater than the outflows. To budget
for a positive subsidy an agency must receive an appropriation. HUD
also uses the cash flow model to annually estimate the liability for
loan guarantees (LLG), which represents the net present value of future
cash flows for active loans, taking into account the prior performance
of those loans. HUD estimates the LLG for individual cohorts as well as
for all cohorts combined.[Footnote 21] The LLG is a useful statistic
because unusual fluctuations in the LLG can alert managers to financial
risks that require further attention.
HUD in recent years has enhanced its cash flow model for the HECM
program. In 2007, the HUD Office of Inspector General's (OIG) annual
audit of FHA's financial statements cited a material weakness in the
cash flow model FHA used to generate credit subsidy estimates for the
HECM program.[Footnote 22] Among other things, the audit noted
technical errors in the model, significant discrepancies between
projected and actual cash flows, and a lack of supporting documentation
for certain modeling decisions. Partly in response to the OIG audit,
HUD made a number of improvements to both the model and its supporting
documentation, and in 2008 the HUD OIG eliminated the material
weakness.[Footnote 23] For example, HUD improved the methodology it
uses for its cash flow model. In the past, HUD used historical averages
for termination and recovery rates for projecting cash flows. In 2008,
HUD began to incorporate forecasts of national house price appreciation
and interest rates from IHS Global Insight, an independent source for
economic and financial forecasts, into its modeling.[Footnote 24]
Additionally, HUD improved the way it estimates the growth of unpaid
principal balances, which HUD uses to calculate the LLG. In the past,
HUD used both active and terminated loans to generate this estimate.
Since 2008, HUD has included only active loans to generate this
estimate, which is more appropriate because the LLG represents the
expected future cash flows of currently active loans. HUD also
developed a master database of loan-level information to support the
HECM cash flow model. Previously, HUD staff had to draw on data from
multiple sources, which increased the chance of analytical errors.
Finally, HUD made a number of enhancements to its documentation of
estimation processes, including how macroeconomic projections are
incorporated into the cash flow model.
HUD plans to subject the HECM program to an annual actuarial review,
which should provide additional insight into the program's financial
condition. Such a review would likely assess if program reserves and
funding were sufficient to cover estimated future losses, as well as
the sensitivity of this analysis to different economic and policy
assumptions. Historically, the HECM program has not had a routine
actuarial review because it was supported by the General Insurance and
Special Risk Insurance Fund (GI/SRI) Fund, which does not have such a
review requirement.[Footnote 25] However, as of fiscal year 2009, the
HECM program is in the Mutual Mortgage Insurance (MMI) Fund, which is
statutorily required to receive an independent actuarial review each
year and includes FHA's largest mortgage insurance program.[Footnote
26] HUD officials told us that future actuarial reviews of the MMI Fund
will include a separate assessment of the HECM program.
HUD also is considering producing credit subsidy re-estimates for the
HECM program.[Footnote 27] As discussed later in this report, HUD has
generated credit subsidy estimates for individual HECM cohorts for
several years. However, HUD officials told us that, until recently,
they did not have the data necessary to produce subsidy re-estimates
for HECMs. Specifically, the officials noted that for HECM cohorts
prior to 2009, assets for HECMs were aggregated with assets from other
programs in the GI/SRI Fund and not accounted for separately. HUD
officials said that they are now accounting for HECM assets separately,
which will enable them to produce re-estimates for the HECM program. Re-
estimates can highlight cohorts that are not expected to meet original
budget estimates. This information could help inform future actions to
manage HUD's insurance risk and control program costs.
Prior Cost Estimates Indicated That the HECM Program Was Profitable but
Current Estimates Forecast Losses, Primarily Due to Revised House Price
Assumptions:
HUD's most recent estimates of two important financial indicators for
the HECM program--the credit subsidy rate and the LLG--suggest weaker
financial performance than previously estimated, largely due to more
pessimistic house price assumptions. All other things being equal,
lower house price appreciation can increase HUD's insurance losses
because it makes it less likely that the value of the home will cover
the loan balance. Analyses by HUD have found that the financial
performance of the HECM program is sensitive to long-term trends in
house prices. HUD officials told us that HECM program performance is
less sensitive to short-term price declines because borrowers with
HECMs, unlike those with traditional forward mortgages, do not have an
incentive to terminate (or default on) their loans when prices fall.
HUD has made credit subsidy estimates for HECM cohorts from 2006
forward. Because the HECM program was relatively small prior to 2006,
HUD did not produce separate subsidy estimates for the HECM program but
included HECMs in its estimates of subsidy costs for the GI/SRI Fund as
a whole. For the 2006 through 2009 HECM cohorts, HUD estimated negative
subsidy rates ranging from -2.82 percent in 2007 to -1.37 percent in
2009 (see figure 10). However, for the 2010 cohort, HUD estimated a
positive subsidy rate of 2.66 percent. Because HUD is expecting to
insure about $30 billion in HECMs in 2010, this rate corresponds to a
subsidy cost of $798 million. As required by the Federal Credit Reform
Act, the President's budget for fiscal year 2010 includes a request for
this amount.[Footnote 28]
Figure 10: HECM Credit Subsidy Rates, Fiscal Years 2006 through 2010:
[Refer to PDF for image: vertical bar graph]
Cohort year: 2006;
Subsidy rate: -1.74%;
Subsidy required: No.
Cohort year: 2007;
Subsidy rate: -2.82%;
Subsidy required: No.
Cohort year: 2008;
Subsidy rate: -1.90%;
Subsidy required: No.
Cohort year: 2009;
Subsidy rate: -1.37%;
Subsidy required: No.
Cohort year: 2010;
Subsidy rate: 2.66%;
Subsidy required: Yes.
Source: GAO analysis of OMB federal credit supplement data (2006
through 2010).
[End of figure]
HUD officials told us that the positive subsidy rate for fiscal year
2010 largely was due to incorporating more conservative assumptions
about long-term house price trends than had been used for prior
cohorts. For budgeting purposes, the Administration decided to use more
modest appreciation rates than the private sector forecasts HUD
typically uses. Specifically, the house price appreciation rates used
were 0.5 percent greater than the forecasted inflation rates. HUD
officials told us that if they had used IHS Global Insight projections
to develop the fiscal year 2010 credit subsidy estimate, there would be
no need for an appropriation because the credit subsidy rate would be
negative.
HUD also has estimated the LLG for the HECM program since 2006. As
shown in figure 11, HUD's original LLG estimates grew substantially
from 2007 to 2008, increasing from $326 million to $1.52 billion.
According to FHA's financial statements for fiscal years 2007 and 2008,
the increase was primarily due to the lower house price appreciation
projections used in the 2008 analysis.[Footnote 29] The report noted
that lower appreciation rates result in lower recoveries on mortgages
assigned to HUD, which in turn increases HUD's liability.
Figure 11: Loan Liability Guarantee for the HECM Program, Fiscal Years
2006 through 2008:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2006;
Loan Liability Guarantee: $123 million.
Fiscal year: 2007;
Loan Liability Guarantee: $326 million.
Fiscal year: 2008;
Loan Liability Guarantee: $1,521 million.
Source: GAO analysis of FHA financial statements (2006 through 2008).
[End of figure]
In September 2008, HUD analyzed the sensitivity of the 2008 LLG
estimate for the HECM program as a whole to different assumptions,
including alternative house price scenarios. HUD examined the impact of
house price appreciation that was 10 percent higher and 10 percent
lower than the baseline assumptions from IHS Global Insight for fiscal
years 2009 through 2013. (For example, for a baseline assumption of 4
percent house price appreciation, the lower and higher scenarios would
have been 3.6 percent and 4.4 percent, respectively.) HUD estimated
that the more pessimistic assumption increased the LLG from $1.52
billion to $1.78 billion, while the more optimistic assumption reduced
the LLG to $1.27 billion.
HUD Uses a Conservative Approach in Estimating Program Costs, but
Higher Loan Limits May Increase the Potential for Losses:
When estimating future costs for all HECMS, HUD assumes that the
property value at loan origination is equal to the maximum claim
amount. For loans in which the property value is more than the HECM
loan limit, this approach results in a conservative assumption about
the amount of home equity available at the end of the loan to cover the
loan balance. In these cases, the actual home value at the end of the
loan is likely to be more than what HUD assumes and therefore more
likely to exceed the loan balance at the end of the loan. According to
HUD, because of this conservative approach to estimating costs, the
HECM program does not rely on loans with property values that exceed
the maximum claim amount to operate on a break-even basis over the long-
run.
Higher loan limits enacted under HERA and ARRA may make HUD's approach
less conservative by reducing the proportion of loans for which the
property value exceeds the maximum claim amount. This scenario is
especially likely in locations that previously had relatively low local
loan limits (reflecting their lower home values) but are now subject to
the higher national limit. To illustrate, consider a 65-year-old HECM
borrower with a $400,000 home whose loan limit prior to HERA was
$250,000 (see figure 12). In this scenario, the maximum claim amount
would be the same as the loan limit because the maximum claim amount is
defined as the lesser of the loan limit or the home value. However, if
the loan limit for the same borrower is increased to the HERA-
authorized level of $417,000, the maximum claim amount is the same as
the home value ($400,000). As figure 12 shows, when a borrower's
maximum claim amount is capped by the loan limit, the maximum claim
amount can be substantially lower than the value of the home. All other
things being equal, the potential for losses is low in this scenario
because the projected loan balance is likely to remain less than the
projected home value after the lender assigns the loan to HUD.[Footnote
30] In contrast, when the maximum claim amount is capped by the home's
value, the difference between the projected loan balance and the
projected home value is smaller. The potential for losses is higher
with such a loan because the projected loan balance is more likely to
exceed the projected home value. As also shown in figure 12, when this
effect is combined with declining home prices, the potential for losses
increases.
Figure 12: Illustration of How Increasing the HECM Loan Limit Could
Increase HUD's Losses:
[Refer to PDF for image: three line graphs]
This figure uses three line graphs to depict how increasing the HECM
loan limit could increase HUD's losses. The following information is
depicted:
Pre-HERA;
Maximum claim amount: $250,000;
Loan assigned to HUD: Year 10 of the loan;
Property value and loan balance remain constant: No loss area (property
value exceeds loan balance).
Post-HERA:
Maximum claim amount: $400,000;
Loan assigned to HUD: Year 10 of the loan;
Loan balance escalates at higher rate than property value: Loss area
(loan balance exceeds property value).
Source: GAO.
Note: The trend line for property value assumes house price
appreciation of 4 percent annually--this is the rate HUD assumes in its
pricing of the HECM loan product. The initial loan amount is based on a
$400,000 home, as well as an expected interest rate of 5.43 percent and
a borrower age of 65, which corresponds to a principal limit factor of
64.9 percent. The trend line for loan balance assumes that the borrower
immediately drew down 100 percent of the available loan funds.
[End of figure]
Studies by HUD and others have noted that HECM loans for which the home
value exceeds the maximum claim amount have a positive impact on the
program's financial performance but also have noted the potential
negative impact of raising the loan limit. When the HECM program
started in 1990, HUD developed a statistical model to estimate borrower
payments and insurance risk. HUD's technical explanation of the model
acknowledges that future expected losses are smaller for HECMs with a
maximum claim amount capped by the loan limit, as compared with HECMs
with a maximum claim amount equal to the home value.[Footnote 31]
Similarly, actuarial reviews of the HECM program--conducted in 1995,
2000, and 2003--concluded that the negative net liability of the HECM
program resulted from homes valued at more than the HECM loan limit
cross-subsidizing those valued at less than the limit.[Footnote 32] The
2003 actuarial review also examined how the financial condition of the
HECM program would have been affected had a higher, national loan limit
been in place when existing HECMs were originated. The analysis found
that the higher loan limits would have reduced the expected net
liability of the HECM program from -$54.0 million to -$11.4 million.
This finding is consistent with a Congressional Budget Office (CBO)
analysis of a 2007 legislative proposal to increase the HECM loan limit
to $417,000 nationwide. CBO concluded that the increase would reduce
HUD's credit subsidy rate for the 2008 cohort of loans from -1.9
percent to -1.35 percent.[Footnote 33]
The percentage of HECMs with maximum claim amounts capped by the loan
limit has declined in recent years (see figure 13). Since the inception
of the program, this percentage has ranged from 24 percent to 47
percent. However, this proportion has declined in recent years,
dropping from 42 percent in fiscal year 2006 to 25 percent in fiscal
year 2008. Furthermore, HUD data show that this proportion dropped to
18 percent for the first 4 months of fiscal year 2009, likely due in
part to the higher loan limit.
Figure 13: Percentage of HECMs with Maximum Claim Amounts Limited by
the Program Limit:
[Refer to PDF for image: stacked vertical bar graph]
Fiscal year: 1990;
Maximum claim amounts capped by value of property: 60%;
Maximum claim amounts capped by HECM loan limit: 40%.
Fiscal year: 1991;
Maximum claim amounts capped by value of property: 52%;
Maximum claim amounts capped by HECM loan limit: 48%.
Fiscal year: 1992;
Maximum claim amounts capped by value of property: 53%;
Maximum claim amounts capped by HECM loan limit: 47%.
Fiscal year: 1993;
Maximum claim amounts capped by value of property: 61%;
Maximum claim amounts capped by HECM loan limit: 39%.
Fiscal year: 1994;
Maximum claim amounts capped by value of property: 62%;
Maximum claim amounts capped by HECM loan limit: 38%.
Fiscal year: 1995;
Maximum claim amounts capped by value of property: 61%;
Maximum claim amounts capped by HECM loan limit: 39%.
Fiscal year: 1996;
Maximum claim amounts capped by value of property: 68%;
Maximum claim amounts capped by HECM loan limit: 32%.
Fiscal year: 1997;
Maximum claim amounts capped by value of property: 71%;
Maximum claim amounts capped by HECM loan limit: 29%.
Fiscal year: 1998;
Maximum claim amounts capped by value of property: 73%;
Maximum claim amounts capped by HECM loan limit: 27%.
Fiscal year: 1999;
Maximum claim amounts capped by value of property: 75%;
Maximum claim amounts capped by HECM loan limit: 25%.
Fiscal year: 2000;
Maximum claim amounts capped by value of property: 76%;
Maximum claim amounts capped by HECM loan limit: 24%.
Fiscal year: 2001;
Maximum claim amounts capped by value of property: 69%;
Maximum claim amounts capped by HECM loan limit: 31%.
Fiscal year: 2002;
Maximum claim amounts capped by value of property: 69%;
Maximum claim amounts capped by HECM loan limit: 31%.
Fiscal year: 2003;
Maximum claim amounts capped by value of property: 66%;
Maximum claim amounts capped by HECM loan limit: 34%.
Fiscal year: 2004;
Maximum claim amounts capped by value of property: 64%;
Maximum claim amounts capped by HECM loan limit: 36%.
Fiscal year: 2005;
Maximum claim amounts capped by value of property: 59%;
Maximum claim amounts capped by HECM loan limit: 41%.
Fiscal year: 2006;
Maximum claim amounts capped by value of property: 58%;
Maximum claim amounts capped by HECM loan limit: 42%.
Fiscal year: 2007;
Maximum claim amounts capped by value of property: 69%;
Maximum claim amounts capped by HECM loan limit: 31%.
Fiscal year: 2008;
Maximum claim amounts capped by value of property: 75%;
Maximum claim amounts capped by HECM loan limit: 25%.
Fiscal year: 2009;
Maximum claim amounts capped by value of property: 82%;
Maximum claim amounts capped by HECM loan limit: 18%.
Source: GAO analysis of HUD data.
Note: Fiscal year 2009 data include HECMs insured from October 1, 2008,
through January 31, 2009.
[End of figure]
HUD officials acknowledged that a reduction in the proportion of loans
with maximum claim amounts capped by the loan limit could have a
negative effect on the program's financial performance. However, they
also indicated that their conservative approach to estimating program
costs mitigates the associated risks.
Agency Comments and Our Evaluation:
We provided a draft of this report to HUD for its review and comment.
In comments provided to us in an e-mail, HUD concurred with our report
and provided a technical comment, which we incorporated into the
report.
We are sending copies of this report to interested congressional
parties, the Secretary of the Department of Housing and Urban
Development, and other interested parties. In addition, the report will
be available at no charge on our Web site at [hyperlink,
http://www.gao.gov]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. If you or your staff has any questions about this report,
please contact me at (202) 512-8678 or sciremj@gao.gov. GAO contact
information and staff acknowledgments are listed in appendix IV.
Signed by:
Mathew J. Scirč:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to examine (1) how the Housing and Economic
Recovery Act of 2008 (HERA) changes to the Home Equity Conversion
Mortgage (HECM) program and other factors have affected HECM lenders'
planned participation in the reverse mortgage market, (2) the extent to
which HERA's changes to HECM origination fees and loan limits will
affect costs to borrowers and the loan amounts available to them, and
(3) Department of Housing and Urban Development's (HUD) actions to
evaluate the financial performance of the HECM program, including the
potential impact of loan limit and house price changes.
To address these objectives, we reviewed laws, regulations and guidance
relevant to the HECM program, including provisions in HERA, the
American Recovery and Reinvestment Act of 2009 (ARRA), and HUD
handbooks and mortgagee letters. We also spoke with agency, industry,
and nonprofit officials, including those at HUD, Ginnie Mae, Fannie
Mae, the National Reverse Mortgage Lenders Association (NRMLA), the
Mortgage Bankers Association (MBA), and AARP.
To determine how HERA's provisions have affected lenders' planned
participation in the reverse mortgage market, we spoke with industry
and nonprofit officials--including those at Ginnie Mae, Fannie Mae,
AARP, NRMLA, and MBA--to understand how recent legislative and economic
changes were affecting the industry. To more specifically identify the
influence of legislation and economic factors on HECM lenders, we
conducted a Web-based survey of a random probability sample of the
2,779 lenders that originated HECMs on a retail basis in fiscal year
2008. We used HUD records of HECM-certified lenders making at least one
such loan in fiscal year 2008, and supplemented HUD's loan company
officer contact information with names and e-mail addresses of officers
at those lenders in our sample who also had memberships in NRMLA. For
the remaining sampled lenders for which we lacked contact information,
we made telephone calls to identify the most appropriate recipient for
our survey invitation.
We drew a stratified sample, allocating our selections across three
groups defined by the number of HECMs made in fiscal year 2008,
sampling from the groups with larger lenders at a higher rate than from
the groups with smaller lenders (see table 2). We sampled all 51
members of the stratum with the largest lenders (300 or more loans). We
sampled so few (30) and received so few usable responses (8) from the
stratum with the smallest lenders (1 to 9 loans), that we considered
this a nongeneralizable sample and excluded it from our quantitative
analysis. In addition, lenders in the smallest lender stratum account
for less than 5 percent of all loans, and thus would not influence
overall estimates very much. Responses from the smallest lenders
stratum were used only as case study examples in our analysis.
Table 2: Survey Population and Sample Dispositions:
Stratum: Very small (1-9 HECM loans in 2008)[C]; Population: 1,837;
Fiscal year 2008 HECMs: 5,549; Original sample: 30; Total responses:
10; Ineligible responses: 2; Usable responses: 8; Non-responses: 20;
e[A]: .80; Response rate[B]: 33.3.
Stratum: Small (10 to 59 loans in 2008);
Population: 669;
Fiscal year 2008 HECMs: 16,132;
Original sample: 170;
Total responses: 83;
Ineligible responses: 3;
Usable responses: 80;
Non-responses: 87;
e[A]: .96;
Response rate[B]: 48.8.
Stratum: Medium (60 to 299 loans in 2008);
Population: 222;
Fiscal year 2008 HECMs: 27,247;
Original sample: 113;
Total responses: 66;
Ineligible responses: 13;
Usable responses: 53;
Non-responses: 47;
e[A]: .80;
Response rate[B]: 58.4.
Stratum: Large (300 or more loans in 2008);
Population: 51;
Fiscal year 2008 HECMs: 63,087;
Original sample: 51;
Total responses: 41;
Ineligible responses: 2;
Usable responses: 39;
Non-responses: 10;
e[A]: .95;
Response rate[B]: 80.8.
Stratum: Total[C];
Population: 2,779;
Fiscal year 2008 HECMs: 112,015;
Original sample: 364;
Total responses: 200;
Ineligible responses: 20;
Usable responses: 180;
Non-responses: 164; e[A]: .91;
Response rate[B]: 56.9%[C].
Source: GAO.
[A] e = estimated eligibility rate of nonresponding sample cases whose
eligibility is unknown.
[B] Response rate is unweighted, as defined by AAPOR RR3.
[C] "Very small" stratum not included in overall response rate
calculations.
[End of table]
To help develop our questionnaire, we consulted with an expert at
NRMLA. We pretested our draft questionnaire to officials at three HECM
lenders in our population and made revisions to it before finalization.
Legal and survey research specialists in GAO also reviewed the
questionnaire.
Before the survey, in early March 2009, NRMLA sent letters to those
lenders in our sample who were also members in that organization,
endorsing our survey and encouraging response. In March 2009, we sent e-
mails with links to our Web questionnaire and unique login information
to each member of our sample with valid e-mail addresses. For sampled
companies for which we were unable to obtain working e-mail addresses,
we mailed paper versions of the questionnaires. Nonresponding lenders
were sent additional e-mails or copies of questionnaires from March
through May. We also made telephone calls in April to nonrespondents
encouraging them to respond. Our survey closed in early May 2009. We
received a total of 180 usable responses, for an overall response rate
of 57 percent.[Footnote 34] The "weighted" response rate for the
survey, which takes into account the relative numbers of lenders in the
population that sampled lenders in each of our three size strata had to
represent, was 53 percent. The most common reason for ineligibility
among our sample firms was closure, merger, or other discontinuation of
business in the reverse mortgage industry.
Because we followed a probability procedure based on random selections,
our sample is only one of a large number of samples that we might have
drawn. Since each sample could have provided different estimates, we
express our confidence in the precision of our particular sample's
results as a 95 percent confidence interval (e.g., plus or minus 10
percentage points). This is the interval that would contain the actual
population value for 95 percent of the samples we could have drawn. As
a result, we are 95 percent confident that each of the confidence
intervals in this report will include the true values in the study
population. Unless otherwise noted, our estimates have margins of error
of plus or minus 10 percentage points or less at the 95 percent
confidence interval.
In addition to sampling error, the practical difficulties of conducting
any survey may introduce other errors:
1. Nonresponse--bias from failing to get reports from lenders whose
answers would have differed significantly from those who did
participate.
2. Coverage--failure to include all eligible HECM lenders in the list
from which we sampled, or including ineligible firms.
3. Measurement--errors in response.
4. Data processing.
We took steps in developing the questionnaire, collecting the data, and
analyzing them to minimize such errors. For example, our pretesting and
expert reviews of the questionnaire resulted in question changes that
reduced the possibility of measurement error, and all data processing
and analysis programming was verified by independent analysts. In
addition, we followed up on some unlikely answers by recontacting
sampled lenders or conducting followup research on them to edit
erroneous answers and declare some firms ineligible for our survey,
thereby reducing measurement and coverage error.
To assess the risk of nonresponse bias, we compared the response rates
of lenders across categories of two characteristics that might be
related to our key variables--the effect of HERA changes and other
factors on the likelihood of continuation of HECM lending in the
future. The two characteristics known for both respondents and
nonrespondents were the number of years the lender had been offering
HECMs and the state in which the lender's home office is located, from
which we could develop a measure of size of loan activity in each state
by summing the number of loans made by lenders whose home offices were
in a given state. We found no statistically significant association
between these two characteristics and the likelihood of response.
[Footnote 35] Although this does not eliminate the possibility of
nonresponse bias, we found no evidence of bias based on our analysis of
this available data.
To determine the effect of the HERA provisions on HECM borrowers, we
examined changes in the up-front mortgage insurance premium,
origination fee, and loan funds available to borrowers. The up-front
mortgage insurance premium is 2 percent of the maximum claim amount.
HERA did not change this rate, but because of HERA's change to the HECM
loan limit, some borrowers may be eligible for larger loans and
therefore have higher maximum claim amounts. Since the premium is
calculated based on the maximum claim amount, these borrowers will pay
a higher up-front mortgage insurance premium than they would have prior
to HERA. Before HERA, the origination fee was calculated as 2 percent
of the maximum claim amount with a minimum fee of $2,000. HERA changed
the calculation of the origination fee to 2 percent of the first
$200,000 of the maximum claim amount plus 1 percent of the maximum
claim amount over $200,000, with a maximum fee of $6,000. In
implementing HERA, HUD also increased the minimum origination fee by
$500 to $2,500.
We used two different approaches to assess the impact of the HERA
changes. First, we performed a mathematical analysis showing the
difference between the up-front costs before and after HERA.
Specifically, we derived equations for calculating pre-HERA and post-
HERA up-front costs for borrowers with maximum claim amounts in
different ranges ($0 to $100,000; $100,000 to $125,000; $125,000 to
$200,000; $200,000 to $400,000; and $400,000 to $625,500).[Footnote 36]
For each range, we subtracted the pre-HERA equation from the post-HERA
equation to derive an equation for calculating the change in up-front
costs due to the HERA provisions. We then used these equations to
calculate the potential change in up-front costs in dollars terms. We
did this analysis separately for cases in which the maximum claim
amount would increase under HERA and cases in which the maximum claim
amount would remain the same. Appendix III shows the details of this
analysis.
Second, we applied the HERA changes to HUD loan-level data for HECMs
that borrowers obtained in calendar year 2007. We compared the results
to the actual up-front costs and loan funds available for these
borrowers. To perform this analysis, we obtained data from HUD's Single-
family Data Warehouse. We assessed the reliability of these data by (1)
reviewing existing information about the data and the system that
produced them, (2) interviewing HUD officials knowledgeable about the
data, and (3) performing electronic testing of required data elements.
We determined that the data we used were sufficiently reliable for the
purposes of this report. As shown in table 3, the universe of 2007
HECMs used in our analysis included 101,480 loans.[Footnote 37] We
applied the $417,000 national loan limit and HERA's changes to the
origination fee calculation to the 2007 HECMs. For each borrower, we
calculated the new maximum claim amount, origination fee, up-front
mortgages insurance premium, and loan funds available under the HERA
rules and compared our results to the actual 2007 values. We summarized
our results by calculating the average changes in these amounts.
Table 3: Universe of 2007 HECMs by Home Value and Maximum Claim Amount
Category:
Home value: Under $125,000;
Maximum claim amount equals loan limit: 0;
Maximum claim amount equals home value: 17,303;
Total: 17,303; (17%).
Home value: $125,000 to $200,000;
Maximum claim amount equals loan limit: 6;
Maximum claim amount equals home value: 27,548;
Total: 27,554); (27%).
Home value: $200,001 to $399,999;
Maximum claim amount equals loan limit: 14,535;
Maximum claim amount equals home value: 27,474;
Total: 42,009; (41%).
Home value: $400,000 or more;
Maximum claim amount equals loan limit: 14,433;
Maximum claim amount equals home value: 181;
Total: 14,614; (14%).
Home value: Total;
Maximum claim amount equals loan limit: 28,974; (29%);
Maximum claim amount equals home value: 72,506; (71%);
Total: 101,480; (100%).
Source: GAO analysis of HUD data.
Note: Percentages do not add to 100 because of rounding.
[End of table]
To illustrate the potential effect of modest margin rates increases
stemming from HERA's change to the origination fee calculation, we
applied a 0.25 percentage point increase to the margin rate for the
2007 HECMs adjusted to reflect the HERA provisions.[Footnote 38] We
determined the resulting changes in the loan funds available to
borrowers using HUD's table of principal limit factors. To provide
perspective on the HERA-related margin rate changes, we compared margin
rates from a 3 month period 1 year prior to the implementation of HERA
(November 2007 through January 2008) to the margin rates from the 3
month period after the implementation of HERA (November 2008 through
January 2009).
To examine HUD's actions to evaluate the financial performance of the
HECM program, we reviewed HUD's budget estimates for the HECM program
for fiscal years 2005 through 2010. We also compiled and analyzed
financial performance information about the HECM program, including the
liability for loan guarantee (LLG) and credit subsidy estimates. For
example, we examined the Federal Housing Administration's (FHA) Annual
Management Reports (2005, 2006, 2007, and 2008), which include FHA's
annual financial statements; HUD Office of the Inspector General (OIG)
audits of FHA's financial statements (2005, 2006, 2007, and 2008);
actuarial reviews of the HECM program (1995, 2000, and 2003); and
Congressional Budget Office cost estimates relevant to the HECM
program. We also reviewed other analyses HUD has conducted of program
costs, such as the sensitivity of estimated cash flows to alternative
economic assumptions. We interviewed FHA officials about their budget
estimates and program analyses. Additionally, we reviewed information
about HUD's HECM cash flow model, including a technical explanation of
the model published in 1990 and recent changes to the model. We also
reviewed historical house price appreciation rates from the Federal
Housing Finance Agency and projected house price appreciation rates
from IHS Global Insight. To examine the percentage of HECMs with
maximum claim amounts capped by the loan limit, we analyzed loan-level
data on HECMs from HUD's Single-family Data Warehouse. As noted
earlier, we determined that the data we used were sufficiently reliable
for this analysis. In addition, we reviewed federal agency standards
for managing credit programs, such as those contained in the Federal
Credit Reform Act (FCRA), related Office of Management and Budget
requirements and instructions, and Federal Accounting Standards
Advisory Board guidance. Finally, we interviewed HUD OIG officials,
industry participants, and mortgage market analysts.
We conducted this performance audit from September 2008 through July
2009, in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Impact of Loan Limit Increase in the American Recovery and
Reinvestment Act of 2009 on HECM Lenders:
The American Recovery and Reinvestment Act (ARRA) raised the national
loan limit for Home Equity Conversion Mortgages (HECM) to $625,500
through December 31, 2009. In our survey of HECM lenders, we asked
lenders about the influence the increased loan limit would have on
their likelihood to offer HECMs and non-HECM reverse mortgages (see
figure 14). Additionally, we asked how they expected consumer demand
for HECMs to increase as a result of the ARRA loan increase (see figure
15). See figures 14 and 15 for survey questions and estimates based on
our survey results.
Figure 14: Influence of ARRA's Increase to Loan Limits on Lenders'
Plans to Offer Reverse Mortgages:
[Refer to PDF for image: illustrated table]
Plans to offer HECMs:
Moderate or great upward influence: 65%;
Little or no influence: 34%;
Great or moderate downward influence: 0;
Don't know: 1%;
Not applicable: N/A.
Plans to offer non-HECM reverse mortgages:
Moderate or great upward influence: 29%;
Little or no influence: 54%;
Great or moderate downward influence: 11%;
Don't know: 6%;
Not applicable: N/A.
Source: GAO analysis of survey of HECM lenders.
Note: Figure shows estimates based on GAO survey of HECM lenders.
Estimates have margins of error of plus or minus 10 percentage points
or less at the 95 percent confidence interval.
[End of figure]
Figure 15: Influence of ARRA's Increase to Loan Limits on Consumer
Demand for HECMs:
[Refer to PDF for image: illustrated table]
Lenders‘ expectation of ARRA‘s effect on consumer demand for HECMs:
Increase somewhat or greatly: 82%;
No effect: 13%;
Decrease somewhat or greatly: 0;
Don't know: 5%;
Not applicable: N/A.
Source: GAO analysis of survey of HECM lenders.
Note: Figure shows estimates based on GAO survey of HECM lenders.
Estimates have margins of error of plus or minus 10 percentage points
or less at the 95 percent confidence interval.
[End of figure]
[End of section]
Appendix III: Effect of the Housing and Economic Recovery Act of 2008
on Up-front Costs for HECM Borrowers:
Home Equity Conversion Mortgage (HECM) borrowers may experience changes
in up-front costs due to the Housing and Economic Recovery Act of
2008's (HERA) change to the calculation of the origination fee, the
loan limit, or both. Generally, borrowers with house values greater
than the prior HECM loan limit will be able to borrow more under HERA's
higher loan limit, while borrowers with a wide range of house values
may be affected by the changes in origination fees.[Footnote 39]
There are two up-front costs. The first--the up-front mortgage
insurance premium--is 2 percent of the maximum claim amount. The
second--the origination fee--was calculated before HERA as 2 percent of
the maximum claim amount with a minimum fee of $2,000. HERA changed the
calculation of the origination fee to 2 percent of the first $200,000
of the maximum claim amount plus 1 percent of the maximum claim amount
over $200,000, with a maximum fee of $6,000. In implementing HERA, HUD
also increased the minimum origination fee by $500 to $2,500.
To determine how borrowers would be affected by these changes, we
developed mathematical equations for calculating the up-front costs
under both the HERA and pre-HERA rules. We subtracted the equation for
the pre-HERA rules from the equation for the HERA rules to derive an
equation for the change in up-front costs resulting from HERA. A
positive value indicates that a borrower would pay more under HERA, and
a negative value indicates that a borrower would pay less. Figures 16
and 17 illustrate how these changes affect different categories of
borrowers.
Figure 16 shows the results for borrowers who have home values lower
than the previous loan limit. The maximum claim amount is not affected
by HERA's change in loan limit. Therefore, for these borrowers, changes
in up-front costs derive only from changes in the origination fee.
Figure 16: Changes to Up-front Costs for Borrowers Not Affected by
HERA's Change in Loan Limit:
[Refer to PDF for image: table]
Maximum claim amount (MC): $0 to $100,000;
Equation for change in up-front costs due to HERA (dollars): 500;
Range of change to up-front costs: $500 more.
Maximum claim amount (MC): $100,000 to $125,000;
Equation for change in up-front costs due to HERA (dollars): 2,500 -
(0.02 X MC);
Range of change to up-front costs: from $0 to 500 more.
Maximum claim amount (MC): $125,000 to $200,000;
Equation for change in up-front costs due to HERA (dollars): 0;
Range of change to up-front costs: $0.
Maximum claim amount (MC): $200,000 to $400,000;
Equation for change in up-front costs due to HERA (dollars): 2,000 -
(0.01 X MC);
Range of change to up-front costs: from $0 to $2,000 less.
Maximum claim amount (MC): $400,000 to $625,500;
Equation for change in up-front costs due to HERA (dollars): 6,000 -
(0.02 X MC);
Range of change to up-front costs: from $2,000 to $6,510 less.
Source: GAO.
[End of figure]
Figure 17 shows the results of the calculation for borrowers who were
affected by HERA's increase in loan limit. These borrowers would pay up-
front mortgage insurance premiums and origination fees based on a
higher maximum claim amount. However, depending on the maximum claim
amount, the origination fee may have decreased rather than increased.
The net change in up-front costs for this grouping is therefore
indeterminable without knowing the old and new maximum claim amounts.
Figure 17: Changes to Up-front Costs for Borrowers Affected by HERA's
Change in Loan Limit:
[Refer to PDF for image: table]
New Maximum claim amount (NMC): $125,000 to $200,000;
Equation for change in up-front costs due to HERA (dollars): (0.04 x
NMC) - (0.04 x OMC);
Range of change to up-front costs for given old maximum claim amounts
(OMC)(OMC = $125,000 to $200,000): from $0 to $3,000 more.
Maximum claim amount (MC): $200,000 to $400,000;
Equation for change in up-front costs due to HERA (dollars): (0.03 x
NMC) - (0.04 x OMC) + 2,000;
Range of change to up-front costs for given old maximum claim amounts
(OMC) (OMC = $125,000 to $200,000): from $0 to $9,000 more;
Range of change to up-front costs for given old maximum claim amounts
(OMC) (OMC = $200,000 to $400,000): from $2,000 less to $6,000 more.
Maximum claim amount (MC): $400,000 to $625,500;
Equation for change in up-front costs due to HERA (dollars): (0.02 x
NMC) - (0.04 x OMC) + 6,000;
Range of change to up-front costs for given old maximum claim amounts
(OMC) (OMC = $125,000 to $200,000): from $6,000 to $13,510 more;
Range of change to up-front costs for given old maximum claim amounts
(OMC) (OMC = $200,000 to $400,000): from $2,000 less to $10,510 more;
Range of change to up-front costs for given old maximum claim amounts
(OMC) (OMC = $400,000 to $625,500): from $6,510 less to $2,510 more.
Source: GAO.
Note: New maximum claim amounts and old maximum claim amounts less than
$125,000 are not valid because no local loan limits were less than
$125,000.
[End of figure]
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Mathew J. Scirč, at (202) 512-8678 or sciremj@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Steve Westley, Assistant
Director; Anne Akin, Kathleen Boggs, Joanna Chan, Rudy Chatlos, Karen
Jarzynka, John McGrail, Marc Molino, Mark Ramage, Carl Ramirez, Barbara
Roesmann, and Jennifer Schwartz made key contributions to this report.
[End of section]
Footnotes:
[1] For information on consumer protection issues regarding HECMs, see
GAO, Product Complexity and Consumer Protection Issues Underscore Need
for Improved Controls over Counseling for Borrowers, [hyperlink,
http://www.gao.gov/products/GAO-09-606] (Washington, D.C.: June 29,
2009).
[2] P.L. 110-289
[3] The Secretary of HUD has the authority to set a minimum origination
fee. For purposes of this report, our use of the terms "HERA
provisions" and "HERA changes" includes HUD's change to the program's
minimum origination fee.
[4] Prior to HERA, some parts of Hawaii had HECM loan limits exceeding
$417,000. HERA did not change those limits. As a result of the American
Recovery and Reinvestment Act of 2009, the HECM loan limit was
increased in all areas of the country to $625,500 through December 31,
2009.
[5] The principal limit factor can range from 20.4 to 90 percent of the
maximum claim amount.
[6] Present value expresses the worth a future stream of cash inflows
and outflows in terms of an equivalent lump sum received (or paid)
today. Net present value is the present value of estimated future cash
inflows minus the present value of estimated future cash outflows.
[7] FCRA was enacted as part of the Omnibus Budget Reconciliation Act
of 1990 (P.L. 101-508).
[8] We surveyed a random sample of the 2,779 lenders that originated
HECMs on a retail basis in fiscal year 2008. For purposes of this
report, we define retail lenders as lenders that originate HECMs as
opposed to funding HECMs originated by other lenders. For our survey
questions about HERA's changes and other factors influencing lenders'
planned participation, we asked lenders the following: "How, if at all,
has (factor x) influenced your institution's likelihood to start or
continue to offer HECMs on a retail basis?" Accordingly, our results
apply only to lenders' retail HECM business. Unless otherwise noted,
our estimates have margins of error of plus or minus 10 percentage
points or less at the 95 percent confidence interval. See appendix I
for additional information on this survey methodology.
[9] See appendix II for survey results pertaining to the ARRA's
increase in the HECM loan limit to $625,500.
[10] HERA authorized a HECM for Purchase program for seniors who wish
to use a HECM to buy a new home. Unlike a traditional HECM, a HECM for
purchase is made against the value of the home to be purchased rather
than against the value of a home the borrower already owns. The HECM
for purchase program allows a senior to simultaneously buy a new home
and obtain a HECM in a single transaction with a single set of closing
costs, reducing the cost to the senior.
[11] HERA requires that all parties participating in the origination of
HECMs be approved by HUD. This prohibits non-HUD-approved mortgage
brokers--sometimes called HECM advisors--from offering HECMs.
[12] Live pricing eliminated the predetermined pricing contracts that
were previously used, in which lenders negotiated with Fannie Mae to
set the price of all loans made within a predetermined period. Instead,
live pricing implemented a process whereby lenders enter into a
commitment with Fannie Mae to sell a specified volume of loans at a
specified price within 90 days. Fannie Mae officials noted that this
system makes HECM pricing more similar to the pricing system for
forward mortgages in the secondary market. According to some industry
observers, some lenders are reluctant to guarantee the interest rate on
a HECM well in advance of closing because it can take several months to
close a HECM and the loan may not close before the end of the 90-day
commitment period, in which case the lender would incur a penalty.
[13] Fannie Mae maintains a cap on margin rates for HECMs they
purchase.
[14] As previously discussed, the amount of loan funds available to the
borrower depends in part on the interest rate, which includes the
lender's margin. In general, the higher the interest rate, the less
money a borrower will have available from the HECM.
[15] Generally, issuers can then assign the loan to HUD.
[16] HERA did not change the HECM loan limits in parts of Hawaii that
had loan limits higher than $417,000 prior to HERA. As a result,
borrowers in those areas whose house values are greater than the pre-
HERA loan limits will see no change in their up-front mortgage
insurance premiums due to HERA.
[17] Loan funds available for a HECM, is the loan amount after applying
the principal limit factor to the maximum claim amount and deducting
the up-front costs and servicing fee set-aside (see figure 5).
[18] For some Hawaii borrowers, the up-front mortgage insurance premium
would have been the same because their loans were capped by loan limits
that did not change due to HERA.
[19] Of the lenders that responded to the survey question, we estimate
that 48 percent increased margin rates for HECMs offered by their
institution by at least 0.25 percentage points. This estimate has a
margin of error of within plus or minus 13 percentage points.
[20] All other things being equal, an increase in margin rate causes a
decrease in loan funds available (see figure 5). This analysis uses the
10-year Treasury rate that was available to the borrower at loan
origination.
[21] The LLG does not include cash flows that have already occurred.
[22] HUD OIG, Audit of the Federal Housing Administration's Financial
Statements for Fiscal Years 2007 and 2006, 2008-FO-0002 (Washington,
D.C., Nov. 8, 2007).
[23] HUD OIG, Audit of the Federal Housing Administration's Financial
Statements for Fiscal Years 2008 and 2007, 2009-FO-0002 (Washington,
D.C., Nov. 7, 2008).
[24] IHS Global Insight is a private company that forecasts a wide
range of financial and economic indicators.
[25] Pursuant to congressional directives, HUD submitted reports on the
HECM program in 1995, 2000, and 2003 (P.L. 100-242 and P.L. 106-569).
These reports included actuarial reviews of the program.
[26] 12 U.S.C. Sec. 1708(a)(4). HECMs originated in fiscal year 2009
and beyond will be accounted for under the MMI Fund. Loans originated
in or before fiscal year 2008 will be accounted for under the GI/SRI
Fund.
[27] Currently, HUD includes HECMs in its credit subsidy re-estimates
for the GI/SRI Fund as a whole.
[28] On July 17, 2009, the House Committee on Appropriations approved a
fiscal year 2010 appropriations bill for HUD. The bill contained a
provision directing HUD to adjust, as necessary, the principal limit
factor for new loans to ensure that the program operates without a
subsidy. The provision also prohibited HUD from reducing a borrower's
principal limit factor below 60 percent. If enacted, this provision
would eliminate the need for the $798 million budget request but would
also reduce the loan funds available to some borrowers.
[29] HUD, FHA Annual Management Report Fiscal Year 2007 (Washington,
D.C., 2007) and FHA Annual Management Report Fiscal Year 2008
(Washington, D.C., November 2008).
[30] As previously noted, lenders may assign the loan to HUD when the
loan balance reaches 98 percent of the maximum claim amount. At that
point, HUD takes over servicing of the loan and is responsible for
covering any losses.
[31] HUD, The FHA Home Equity Conversion Mortgage Insurance
Demonstration: A Model to Calculate Borrower Payments and Insurance
Risk (Washington, D.C., October 1990).
[32] HUD, Evaluation of the Home Equity Conversion Mortgage Insurance
Demonstration: Report to Congress. (Washington, D.C., 1995); Evaluation
Report of FHA's Home Equity Conversion Mortgage Insurance
Demonstration. Prepared by Abt. Assoc. (Washington, D.C., Mar. 31,
2000); Refinancing Premium, National Loan Limit, and Long-Term Care
Premium Waiver For FHA's HECM Program (Final Report). Prepared by Abt.
Assoc. (Washington, D.C., May 2003).
[33] CBO, Cost Estimate: FHA Modernization Act of 2007 (Washington,
D.C., Oct. 12, 2007).
[34] We used the response rate definition "RR3," as defined by the
American Association for Public Opinion Research in "Standard
Definitions: Final Dispositions of Case Codes and Outcome Rates for
Surveys," [hyperlink,
http://www.aapor.org/uploads/Standard_Definitions_07_08_Final.pdf], p.
35.
[35] We grouped the sample lenders into two groups defined by when they
were first approved to offer HECM loans (before 2000 and 2000 or
later), and found no association between the year category and whether
the lender responded. In addition, we compared sampled lenders in the 5
states with the most HECM loans to the rest of the sampled lenders in
the remaining states and also found no association with whether the
lender responded.
[36] We used $625,500 as a maximum because ARRA resulted in an increase
in the HECM loan limit to that amount.
[37] The 101,480 loans did not include 6,664 HECMs obtained in 2007 to
refinance an existing HECM. We analyzed refinanced HECMs separately
because the calculation for the mortgage insurance premium is different
for these loans than for new HECMs. Our results for the analysis of
refinanced HECMs were similar to those for new HECMs.
[38] As discussed in the body of this report, our survey of HECM
lenders indicated that some lenders have raised their margin rates
modestly to compensate for HERA's limitations on the origination fee.
We did not receive a sufficient number of responses to reliably
estimate the average increase in margin rate for the population. Of the
lenders that responded to the survey question, we estimate that 48
percent increased margin rates for HECMs offered by their institution
by at least 0.25 percentage points. This estimate has a margin of error
of within plus or minus 13 percentage points.
[39] HERA did not change the HECM loan limits in parts of Hawaii that
had loan limits higher than $417,000 prior to HERA. As a result,
borrowers in those areas whose house values are greater than the pre-
HERA loan limits will see no change in their up-front mortgage
insurance premiums due to HERA.
[End of section]
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