November HECM Activity Disappoints

November HECM Activity Disappoints,

8,270 HECM reverse mortgages were endorsed during November 2007 according to the most recent HECM activity report released by HUD. November’s HECM production is a 10.6% gain over the 7,478 HECM’s endorsed in November 2006 but a 1.7% decrease from October 2007 when 8,417 HECMs were endorsed. More troubling: November was the third consecutive month that HECM production fell below its 12-month moving average - the first time this has occurred since mid-2005.

The 12-month moving average provides a clearer trend line of HECM loan growth by smoothing out month-to-month variations. Interestingly, despite the fact that monthly HECM activity has dipped below the 12-month average for three straight months, the 12-month average itself hit an all-time high of 9,004 in November, due mostly to the exceptionally strong HECM activity earlier in the 12-month period.

For the calendar year 2007, 100,286 HECMS were endorsed compared to 77,879 during the first eleven months of 2006 - a 29% rise. For the twelve months ended 11/30/07, 108,046 HECMS were endorsed - a 30% rise over the 82,838 endorsed during the prior twelve month period.

Clearly, falling home values and the problems in the traditional mortgage sector are taking their toll on the once torrid growth of reverse mortgages. We’ll have more to report on the most recent HECM statistics in future posts.

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Written by News & Feeds on April 10th, 2008 with no comments.
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Index Highlights Best (and Worst) Areas For Reverse Mortgages

Index Highlights Best (and Worst) Areas For Reverse Mortgages,

The days of borrowing against ever-rising home equity and having home price appreciation cancel out the pain of loan interest costs appear to be over. Reverse mortgages are often described as “rising debt, falling equity loans”. Yet, for several years reverse mortgage borrowers in many parts of the country have enjoyed a “rising debt, rising equity” environment with home equity growth far outpacing the interest accruing on reverse mortgage debt.

Each quarter we compare the rates of housing value growth reported by OFHEO with average interest rates for HECM reverse mortgages over the comparable one- and five-year periods. The difference (variance) provides a simple measure of the best (and worst) areas for reverse mortgages borrowers. We call this the Reverse Mortgage Friendliness Index.

The most recent results from our quarterly Reverse Mortgage Friendliness Index shows only a small handful of U.S. states had positive variances (Home Value Growth minus HECM Interest Cost) in the twelve months ended September 30, 2007. The bulk of U.S. states experienced negative variances as shown in the heatmap below. The change is attributable to both generally higher HECM interest rates and to the dismal housing market as measured by OFHEO:

For the first time in nearly thirteen years, U.S. home prices experienced a quarterly decline. The OFHEO House Price Index (HPI), which is based on data from sales and refinance transactions, was 0.4 percent lower in the third quarter than in the second quarter of 2007. This is similar to the quarterly decline of 0.3 percent (seasonally-adjusted) shown in the purchase-only index. The annual price change, comparing the third quarter of 2007 to the same period last year showed an increase of 1.8 percent , the lowest four-quarter increase since 1995.

Nationwide, home values for the twelve months ended 9/30/07 increased 1.79% while interest on a standard HECM reverse mortgage averaged 6.37%.

1-Year HECM Variance

5-Year HECM Variance

Following is a list of the ten most friendly and least friendly communities around the country for the twelve months ended 9/30/07:

Use the following link to see information on how reverse mortgage friendly your community is. The new OFHEO data has also been uploaded to the state and metro reverse mortgage information tool.

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Reverse Mortgages and Subprimes - Are there Parallels?

Reverse Mortgages and Subprimes - Are there Parallels?,

As the reverse mortgage industry expands and constantly introduces new (and confusing) products, some people are beginning to wonder whether reverse mortgages are destined to become the next subprime mess.

The same type of financial engineering and securitization that repackaged regular mortgages (once held by local banks) into exotic investment securities sold around the world is now fueling reverse mortgage growth. The financial alchemy worked extremely well with traditional mortgages. Investors exhibited an almost unquenchable thirst for these “safe” mortgage-backed securities (MBS). Yet it’s now clear that credit agencies, regulators and investors themselves did not always understand the investments or the underlying risks.

At the other end of the process, mortgage professionals, sensing the thirst of MBS investors, continually came up with new and exotic mortgage products catering to the needs of just about anyone with dreams of owning their own home. No-doc loans, negative amortization, 2/28s, teaser rates, and a host of other “innovations” were introduced and marketed aggressively. It’s hard not to draw parallels with the current rash of new reverse mortgage product innovations.

But there are many important structural differences when it comes to reverse mortgages and many good reasons to believe that the reverse mortgage market will not go the way of the subprime market:

1. A Much Different Clientèle - Unlike subprime mortgage borrowers (or any traditional mortgage borrower for that matter), reverse mortgage borrowers own their homes outright (or nearly so) at the time they take out the mortgage. There’s no risk of owners walking away from properties they have little equity stake in.

2. Innovation Aimed at Higher-End Homeowners - Subprime loan “innovations” (and lax underwriting) made homeowners out of many lower income people who could barely afford the price tag even at teaser rates. Innovations in the reverse mortgage arena, on the other hand, appear mostly aimed at seniors with homes valued over $400,000. Indeed, the original HECM reverse mortgage program was more targeted toward the economically disadvantaged senior homeowner and has worked quite well for nearly twenty years. HECM FHA insurance premiums have proven more than adequate to cover loan losses.

3. Non-Recourse Loans - No matter what happens to home values, the reverse mortgage borrower is secure in the knowledge that the amount owed will never exceed the market value of the home at the time the loan terminates. Strangely, a reverse mortgage that goes “underwater” (loan balance grows to exceed home value) in some sense is a “win” for the homeowner because it means: a) the homeowner lived longer than the lender expected or, b) the homeowner locked in a reverse mortgage commitment on a home that subsequently declined in value.

4. More Options - People intent on buying a home have only the option of getting a mortgage. In many cases, people stretch too far to qualify and wind up in foreclosure. Seniors considering a reverse mortgage, on the other hand, are looking for additional retirement income (not homeownership) and have other options available to them. They can sell and downsize, borrow via a home equity loan, seek part-time employment, sell other assets, etc. The point is, the reverse mortgage decision is likely to be considered as one of many possibilities and, hopefully, entered into more cautiously than some traditional mortgages have been.

5. Investor Demand - As alluded to above, eager investors snatched-up traditional mortgage-backed securities without fully understanding the underlying risks. This demand helped fuel expansion of mortgage lending to borrowers with questionable ability to repay. The same phenomenon has not reached the reverse mortgage arena - at least not yet. Securitization of reverse mortgages is just beginning and is still but a small niche undiscovered by many investors. It remains to be seen what kind of safeguards are put in place as the reverse market matures. Presumably, credit rating agencies, investors, and regulators will apply some of the things learned to help keep reverse mortgage securitization from experiencing the problems of subprime mortgage backed securities.

6. Less Risk - Reverse mortgages are more predictable and less risky for investors in several ways. For one, borrower employment, income and repayment ability are not factors. The borrower owns the home and the home is the source of loan repayment. Second, although reverse mortgages do not have set repayment dates, repayment streams are very predictable. The reverse mortgage repayment stream is determined by a) homeowner death or, b) mobility (sell the home and move). While there is some risk of prepayment due to rising home values or falling interest rates, the prepayment risk is less than it is with traditional mortgages.

Only time will tell how successful the maturation of the reverse mortgage market is. But although there are some interesting similarities between the current subprime mess and recent reverse mortgage industry developments, there is also plenty of good reasons to be optimistic that reverse mortgages won’t become Mortgage Mess: Act II.

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HECM or HELOC? A Tool to Help You Decide

HECM or HELOC? A Tool to Help You Decide,

In a previous post we noted an important fact largely ignored in the plethora of recent books and articles on reverse mortgages: the majority of reverse mortgages (at least HECM reverse mortgages) terminate within seven years of their origination. For many of these borrowers, a standard home equity line of credit loan (HELOC) might have been a more efficient borrowing tool.

Of course no one can predict the future and we suspect many HECM borrowers entered into their loans with thoughts of staying put for ten years or more. But, as noted, data from actual HECM loans reveals that fewer than 50% of HECMs last beyond seven years. For shorter periods such as these, the HELOC option is certainly worth investigating.

How does someone decide which is better for them - HECM reverse mortgage or HELOC? Let’s start by reviewing the the main points that differentiate the two types of home equity borrowing:

HECM vs HELOC

1. Amount You Can Borrow
HELOC loans are not age-based and typically allow the homeowner to borrow 70% - 100% of available equity depending on household income, credit scores and similar factors. The amount you can borrow with a HECM loan is determined in large part by the age of the homeowner(s) with older homeowners eligible to borrow more. A HECM reverse mortgages generally will range between 40%-80% of available home equity. Advantage: HELOC

2. Closing Costs
Closing costs on a HELOC loan are quite reasonable, typically ranging between $400 - $1,500. Some lenders even offer zero closing costs. HECM closing costs, on the other hand, are quite steep largely because of the FHA insurance premiums charged to cover the risk of the loan balance growing in larger than the home’s equity over time. Expect to pay $10,000 - $20,000 in HECM closing costs, depending on the size of the loan. Advantage: HELOC

3. Term of Loan
A HECM reverse mortgage has no set “due date”. The loan is payable only when the homeowner dies, sells, or permanently moves out. HELOC loans typically are due at the end of ten years, after which the loan needs to be repaid or refinanced. Advantage: HECM

4. Required Loan Payments
The main selling point of HECM reverse mortgages is that no loan payments are required until the loan terminates - i.e. the homeowner sells, moves, or dies. Standard HELOC loans, on the other hand, minimally require payment each month of the interest accrued on the loan balance during the prior month. As the HELOC loan balance grows, the required monthly interest payments grow. Advantage: HECM

5. Qualifying
Because HELOC’s require monthly payments, lenders are concerned about the borrowers ability to pay as gauged by credit scores, household income, savings, etc. It is entirely possible that a retired senior homeowner on limited income can be turned down for a HELOC. HECM borrowing criteria are focused on two major factors: age of borrower and the amount of available home equity. Financial wherewithal and credit scores are not a consideration, though if money is owed to the federal government, it can be an issue. Advantage: HECM

6. Interest

Both HELOC and HECM loans are “adjustable rate” loans meaning the interest rate changes (up or down) at specified intervals. The most popular type of HECM loan is the monthly adjusting option while the most popular type of HELOC adjusts rates quarterly.

The interest rate on a HECM loan is capped whereas interest rates on HELOCs generally are not capped. The lifetime “cap” for a monthly HECM is 10%, so a 6.5% original rate could rise to 16.5% before being capped.

Both HELOC and HECM interest rates are determined by adding or subtracting a “margin” to a specified index rate such as the “1-year US Treasury Constant Maturity”, “prime rate” or the “London Interbank Offering Rate (LIBOR)”. With HECM reverse mortgages, there is limited rate competition - lenders apply the same margins to the same indexes (although there now is more variety in margins). There is strong rate competition in the HELOC market among lenders.

Historically, average interest rates on HECMs have tended to be lower than rates on HELOC’s

Interest paid on a HELOC is tax deductible which can substantially reduce the effect rate paid. HECM interest is deductible in the year it is paid (i.e. at loan termination) which may be of limited value.

Slight Advantage: HECM

7. Unused Line of Credit
With both HELOC and HECM loans, interest accrues only on amounts actually drawn down (borrowed). Since most HECM borrowers finance loan closing costs, they carry a substantial loan balance from outset that accrues interest. However, the unused portion of a HECM line of credit has a unique feature: it actually grows at the same basic rate as the borrower is paying on the used loan balance. In other words, the unused line of credit grows much like a savings account, giving the homeowner greater future borrowing capacity. HELOC loans do not have this feature. Advantage: HECM

Additionally, here’s a more detailed comparison of HECM and HELOC loans.

When all is said and done, the key factor to consider in weighing the HECM vs HELOC loan decision is “how long will the homeowner be able (or desire) to remain in the home?” As a general rule, the longer the period, the more advantageous a HECM looks; the shorter the period, a HELOC may be the better option.

With these facts in mind, we developed the HECM or HELOC Calculator that provides users with side-by-side comparisons of the HELOC and HECM options. Using the calculator will require you to obtain information from an online reverse mortgage calculator. We’ve provided step-by-step guidance to assist.

Please contact us if you have questions or idea on how to make the calculator better.

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Written by News & Feeds on April 10th, 2008 with no comments.
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HECM Mortgage Payoff Types by Borrower Age

HECM Mortgage Payoff Types by Borrower Age,

We came across this table that was part of a presentation at the Mortgage Banker’s Association 94th Annual Convention. The table shows, by borrower age, the cause for HECM reverse mortgage loan payoffs.

We’ve previously written about the surprising fact that the majority of HECM loans are paid off within seven years. This chart expands on this showing the general reasons why HECM loans are paid off.

Most notable is the fact that less than 1/3 of HECMs terminate due to death. Overall, the vast majority of HECMs terminate because the borrower sells and/or moves out - not because the borrower dies while living in their home.

Age, of course, is a major factor with loan terminations among older borrowers more likely to be due to death. But even up to age 90, “mobility” surpasses “mortality” as a cause for HECM loan termination.

This is useful information that potential reverse mortgage borrowers should understand before making a decision. Someone considering a reverse mortgage would do well to mull over these statistics and weigh their expectations against the reality of borrowers who have gone before them.

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HECM Lender Comparison 10/31/2007 vs 10/31/2006

HECM Lender Comparison 10/31/2007 vs 10/31/2006,

In a prior post we examined evolution of the HECM market over the past two years (ended 10/31/06 and 10/31/07) focusing on the geographic location of HUD home equity conversion mortgage endorsements. The table below examines the evolution of lenders’ HECM market shares and growth over the same time frame.

Some observations:

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HECM Market Comparison 10/31/2007 vs 10/31/2006

HECM Market Comparison 10/31/2007 vs 10/31/2006,

Much has changed over the past year in the HECM loan market: Florida has taken over from California as the reverse mortgage activity “hot spot” in the U.S.; new products like the HECM 100 and HECM 125 have emerged, and the overall volume of HECM loans has increased substantially. We thought it would be interesting to track HECM market changes in each of the locations that HUD processes home equity conversion mortgages.

The following table shows, for each location, the absolute change in HECM volume and the change in market share. Time periods used for comparison are the 12-month periods ended 10/31/07 and 10/31/06. Most of the significant changes reflect the emergence of Florida HECM activity and the corresponding declines in California HECM activity that we’ve noted before. But some other interesting points emerge as well:

Boston, New York and Philadelphia are all in the Top 10 with Philadelphia showing particularly strong growth.

The highest growth rate in the nation (254.9%) is in Jackson, MS and is likely related to rebuilding efforts following the Katrina disaster.

56 of 81 locations had HECM growth rates higher than the national average (33.5%) while growth rates in 25 markets were lower than the average.

14 Locations had growth rates over 100%.

10 locations (including all six California locations) had negative growth rates

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HECM Growth By State

HECM Growth By State,

Our prior use of a “heat map” showing Home Equity Conversion Mortgage Growth in U.S. States was well received by visitors so we thought we’d make it a monthly feature using data from HUD’s monthly HECM activity reports.

The map below is based on percentage changes HECM growth rates for the 12-month period ended 10/31/07 compared with the 12-month period ended 10/31/06. RED, ORANGE, and YELLOW states all had HECM growth rates exceeding the national average while BLUE and GREEN had growth below the national average. More detailed color code descriptions are included below the map:

RED: These are the “hottest” growth areas with year-over-year growth in excess of 100%. Florida, for example, saw 17,481 HECM endorsements from 11/1/06 through 10/31/07 compared to 8,577 HECMs in the prior 12-month period (ended 10/31/06) - a growth rate of 103.8%

ORANGE: These states saw HECM activity grow at rates of 50% to 99.99%

YELLOW: These states grew at rates of 33.5% to 49.99%. The average rate of growth for all states for this time period was 33.5%.

GREEN: These states had positive growth, but their growth rates were below the national average (33.5%).

BLUE: These states had negative growth rates. Most notable in this category is California where the number of HECMs endorsed dropped 18.3% from 23,632 to 19,304.

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HECM Activity Shows Moderate Rebound But Still Disappoints

HECM Activity Shows Moderate Rebound But Still Disappoints,

October HECM activity rebounded somewhat from the sharp falloff seen in September, but remained well below the 12-month average. According to HECM MIC reports recently issued by HUD, 8,417 HECMs were endorsed in October, a 9% increase from September’s total of 7,695. But the October total fell about 6 percent under the 12-month moving average of 8,938 monthly HECM endorsements and was, surprisingly, about four percent lower than the 8,789 HECM’s endorsed one year ago in October 2006.

October’s totals, in fact, were the eighth lowest out of the last twelve months:

Clearly, fall out from the mortgage/housing crisis and the associated drop in home values continues to negatively impact reverse mortgages. To see more HECM activity statistics or do your own analysis of the numbers, visit our free HECM Loan Data tool.

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Written by News & Feeds on April 10th, 2008 with no comments.
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Tips For Avoiding Reverse Mortgage Scams

Tips For Avoiding Reverse Mortgage Scams,

We came across a truly useful book the other day: Scam Proof Your Life (377 Smart Ways to Protect You & your Family From Ripoffs, Bogus Deals & Other Consumer Headaches). The book is written by Sid Kirchheimer, “AARP’S Scam Alert Expert” and contains a wealth of practical tips and advice to use in protecting against all types of financial mischief from high-tech identity theft to avoiding used car sales scams.

Our initial interest in picking up the book was to see the advice offered for avoiding reverse mortgage scams. Given the authors AARP connection (even highlighted on the cover) we surely thought a chapter (at least a few pages) would be devoted to dangers in the fast-growing reverse mortgage sector. On this point we were disappointed. Not a word about reverse mortgages or reverse mortgage scams.

A chapter is devoted to “Homes”, but it deals mostly with home purchase mortgages and home improvements. Quite surprising that a book about consumer scams carrying the AARP logo on its cover does not mention reverse mortgages.

Still, Scam Proof is a worthwhile read. One section that does pertain to reverse mortgage borrowers is a concise summary of current research on reasons why seniors may be more susceptible to certain fraud schemes. The research is insightful and worth summarizing and sharing here:

According to Researchers: “(T)he aging brain is more likely to remember false statements as true if they sound familiar or are repeated often. The aging brain is also less likely to recall what was originally said.”

Fix: Get things in writing - quotes, guarantees, your own notes of what was discussed. Having written documentation helps ensure you recollect things accurately.

According to Researchers: “(A)s the day progresses, older individuals grow less capable of processing fine-print details such as contract terms - especially under act-now pressure…There is not much difference in this capacity between older and younger people in the morning…but there is a noticeable decline among older people after about 2 p.m.”

Fix: Avoid afternoon and evening sessions to review/sign important documents. Insist on morning sessions when researchers say you are at your peak.

According to Researchers: “Seniors are no more trusting than anyone else…But they tend to be more patriotic and more religious. and that translates to increased vulnerability to charity and other scams that play on these emotions.”

Fix: Recognize your susceptibility on this point and pay particular attention to pitches that play upon patriotism, government connection, or charity. An example from the realm of reverse mortgages: while it’s good to know that HECM reverse mortgages are “federally insured”, this fact should not have a major bearing on whether a HECM makes financial sense for you. Nor should the “government” connection be misconstrued as an endorsement or evidence that HECM reverse mortgages must be a good for seniors.

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