Times are changing for HUD’s HECM program.

From Housing and Urban Development website:

Despite home sales price declines observed in some markets in 2007, single-family residential real estate values have risen significantly on net over the past decade. The repeat sales house price index produced by the Office of Federal Housing Enterprise Oversight (OFHEO) demonstrates that fact clearly (see Table 10 in the Historical Data section of this issue of U.S. Housing Market Conditions). For older Americans, equity in the home has come to represent a major share of their total wealth; however, owner-occupied housing, as an asset, is largely indivisible—a home cannot easily be sold in increments as can a stock portfolio. Thus, liquidating housing wealth to help meet cash needs during retirement is not easily accomplished. Converting home equity to cash generally requires the sale of the entire asset or the ability to issue debt against home equity.

The sale of a home may provide cash, but it will entail moving to alternate housing. Moving may work well for some homeowners; downsizing a home or selling and renting are both viable options, particularly for wealthier seniors. Studies have shown, however, that most older Americans prefer aging in place to selling and moving (for example, Bayer and Harper, 2000), and lower income seniors who have lived a long time in a modestly priced home that they have fully or nearly paid off may be especially reluctant to sell the home and buy or rent new housing.

Traditional debt, such as first- or second-lien home equity loans or lines of credit, can also provide cash, but the requirement for periodic repayment and an income sufficient to service the debt make this alternative approach less than an ideal solution for lower income seniors wishing to age in place. As a result, the question of how future retirees might be best able to use home equity—often their largest asset—to help fund their retirement has been brought to the forefront of financial planning discourse. One solution that has become increasingly popular is the home equity conversion mortgage, also called a reverse mortgage. A reverse mortgage is debt issued against home equity, which can provide significant sums of cash without the sale of the home and without the need to make periodic repayments. Because no repayment is due until the borrower no longer uses the home as his or her principal residence, no traditional underwriting is necessary to demonstrate the borrower’s financial capacity (income) to service the debt. Reverse mortgages are secured only by the equity in the property and not by the borrower’s capacity to repay.

This article provides an overview of the design and history of the U.S. Department of Housing and Urban Development’s (HUD’s) Home Equity Conversion Mortgage (HECM) program, also known as the Federal Housing Administration (FHA) reverse mortgage program. Arguably, 2008 will be viewed as a turning point in the history of the HECM program as first quarter data confirm that annual origination volume exceeded 100,000 loans for the first time. The decade-long rise in home prices and the persistence of relatively low interest rates since 2000 have increased consumer demand for reverse mortgages. In addition, lender interest in supplying reverse mortgages has increased since 2006, the year in which HECM loans were first packaged into mortgage-backed securities. The resulting surge in HECM originations is timely, given that 2008 is the year in which the first members of the large and financially savvy “baby boom” generation
(born between the years 1946 and 1964) turn 62, the minimum qualifying age for a HECM loan.

Over the next several years, we shall begin to see if baby boomers embrace HECM as a mainstream product to access cash for home improvements, medical bills, or everyday living. We will also soon see if wealthier homeowners will use reverse mortgages for asset management during retirement, enabling the homeowners to consume home equity for living expenses, if desired, before liquidating stock portfolios or other assets. For Full PDF version go here.

Written by charles dennis on June 4th, 2008 with comments disabled.
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