House Financial Services Subcommittee on Insurance, Housing and Community Opportunity Hearing
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Madam Chairwoman and Members of the Subcommittee:
<p>My name is
I was invited to testify on the Home Equity Conversion Mortgage (HECM) program sponsored by the
Background: Reverse Mortgages and Securitization
A reverse mortgage is a loan made against a borrower.s home equity and typically does not require repayment until the borrower moves or is deceased. Payments to the borrower may be made as a lump sum, in monthly payments, or through a line of credit. The loans may be made at a fixed or adjustable rate. Repayment of the loan requires sale of the home to cover the loan amount. Accordingly, the primary risk to a reverse mortgage lender is so-called collateral or crossover risk, which occurs when the value of the home drops below the amount owed.
Reverse mortgages can be divided into two categories. One category consists of reverse mortgages insured and regulated under the FHA.s HECM program. HECM loans require borrowers to purchase insurance from the FHA, which consists of insurance for lenders that protect them from collateral risk, and also insurance that protects homeowners if the lender defaults. n1 Borrowers must at least 62 years old and are required to obtain approved counseling services prior to obtaining a HECM loan. The amount borrowable under a HECM loan is determined by multiplying a principal limit factor n2 by the maximum claim amount, which is the lesser of the appraisal value of the home or FHA.s mortgage limit. This mortgage limit has increased in recent years, from
The other category of reverse mortgages consists of those not regulated or insured pursuant to the HECM program. These loans are typically referred to as conventional (or proprietary) reverse mortgages and may be uninsured or insured privately. Conventional reverse mortgages are typically provided on terms not available under the HECM program, and for that reason are typically larger than HECM loans (so-called "jumbo reverse mortgages"). Compared to HECM loans, conventional reverse mortgages typically have higher interest rates, lower fees, and lower loan-to-value ratios. n4
HECM loans currently dominate the reverse mortgage market. In 2011, only an estimated 5% of all reverse mortgages were conventional. n5 As of
Reverse mortgages may be held by lenders or sold to buyers that seek to hold them in portfolio or pool them together for securitization. Prior to the financial crisis, most reverse mortgages were sold to
The Conventional (Non-HECM) Reverse Mortgage Market
There are several reasons that suggest a private reverse mortgage market can exist without FHA insurance.
First, prior to the financial crisis of 2008, conventional reverse mortgages were widely available and the market for conventional reverse mortgages was steadily growing. Private reverse mortgage programs came to the market just prior to the
Second, conventional reverse mortgages will likely increase in market share as the economy recovers, housing prices stabilize, and credit conditions improve. Currently, the most important obstacles to the development of private reverse mortgages seem to be continued uncertainties regarding housing prices and the willingness of lenders, insurers, and investors to assume housing price risk. n14
Third, the demand for reverse mortgages is likely to substantially increase over the next several years due to an aging population, growing health care costs, and a lack of sufficient savings for retirement. n15 And there is certainly room for the reverse mortgage market grow. A 2009 estimate by Reverse Mortgage Insights found that only 2% of the potential market was using reverse mortgages. n16 Another estimate found that the potential size of the reverse mortgage market is
The likelihood of the conventional reverse mortgage market growing is also supported by the fact that conventional reverse mortgages have several features attractive to borrowers, including lower fees than HECM loans and more flexible terms. n19 Currently, there are reportedly new conventional reverse mortgage products may become available in 2012. For example, the large life insurance company
Fourth, the relatively small market share of conventional reverse mortgages is likely due in large part to the inability of conventional reverse mortgages to compete with HECM loans. In other words, FHA insurance of reverse mortgages may be "crowding out" private market participation. Two separate studies by
Finally, there now seems to be a market consensus developing around how to better underwrite and produce what could become a standardized privately insured reverse mortgage. For example, an underwriter of life insurance and similar products has recently argued that the reverse mortgage market could greatly expand if actuarial methods used in other industries were applied to reverse mortgages. n25 Indeed, life insurance companies already have significant experience in underwriting products based upon mortality and related issues, and such knowledge could likely help the reverse mortgage industry to grow. n26 In addition, more sophisticated underwriting would allow for larger reverse mortgages to be made and thereby draw more lenders to the market. n27
Private Reverse Mortgage-Backed Securitization
Conventional reverse mortgages do not qualify for
First, private reverse mortgage securitizations have taken place without any government guarantee and preceded by several years the existence of
Second, although the growth of the HMBS market is due to investors finding
Third, there is currently a robust multibillion dollar securitization market that operates without any government guarantees. 2011 saw the issuance of
In addition, current difficulties in the private forward MBS market are likely temporary, and thus do not reflect a fundamental problem with securitizing reverse mortgages without a government guarantee. The failure of private MBS to revitalize is due primarily to government sponsored entities expanding the scope of their activities so as to crowd out private markets, ongoing uncertainty about housing prices, and the slow and uncertain pace of regulatory reform in housing and securitization markets. In addition, due to the financial crisis lenders and investors are still very wary of mortgages and related assets. Lenders are currently imposing very strict underwriting standards on borrowers, and investors and credit ratings agencies are taking a highly guarded approach to mortgage risk which has resulted in only a very small amount of conservatively structured private MBS being issued in recent years. This reaction to the subprime crisis will likely decrease over the next few years, however, and further support the development of private securitization for both forward and reverse mortgages.
Conclusion
Based upon the foregoing research,
Although conventional reverse mortgages have higher interest rates than HECM loans, there is good reason to believe that interest rates for such loans would likely decline over time due to the competition that would accompany a growing conventional reverse mortgage market. In addition, securitization of conventional reverse mortgages would also likely cause borrowing costs to decrease. Notably, a 2007 HUD estimate found that securitization of HECM loans could cause borrower interest rates to decrease by 0.5% or more. n38 The primary and secondary markets for reverse mortgages seem to have been just getting off the ground when the financial crisis hit, and public policy should not be predicated on the assumption that current market conditions are permanent.
FHA and
n1
n2 The principal limit factor is based upon borrower age and projected interest rates and is between zero and 1. It ranges anywhere between 0.30 to 0.74.
n3
n4
n5 Bonne Heudorfer,
n6 FHA.s Underwater Problem - Is the Worst Over?
n7 Atare E. Agbamu, The HECM at 20 Series: The Engineers of Reverse Mortgage Securitization, National Mortgage Professional,
n8
n9
n10
n11
n12
n13 Id. at 18; Heudorfer, supra note 5, at 21.
n14
n15 Perera, supra note 4, at 43.
n16 Mazonas, supra note 10, at 12.
n17
n18 Perera, supra note 4, at 44.
n19 Id at 47-48, 51.
n20
n21
n22
n23 Mazonas, supra note 10, at 15.
n24 Foote, supra note 1, at 8.
n25
n26 Id. at 86.
n27 Fasano, supra note 25, at 38.
n28
n29
n30 Atare E. Agbamu, Forward on Reverse Mortgages,
n31 Perera at 45; New View Commentary, Understanding Reverse Mortgage Prepayments: Focus on HECMs,
n32
n33 Commercial Real Estate Direct Staff Report, U.S. Private-Label CMBS Issuance Hits
n34
n35 Standard and Poor.s, U.S. Credit Card ABS Issuer Report: Issuance Exceeded Expectations And Collateral Performance Steadily Improved In Fourth-Quarter 2011; Outlook For 2012 Is Positive,
n36 SIFMA, U.S. Mortgage-Related Securities Issuance, http://www.sifma.org/research/statistics.aspx.
n37 For a comprehensive overview of credit risk transfer governance mechanisms see
n38 Ginnie Mae Report to
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-112-BA04-WState-HShadab-20120509.pdf
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