Should Government Support HECM Reverse Mortgages?
Home Equity Conversion Mortgage (HECM) program is a
Government-supported reverse mortgage program for elderly
homeowners. The program allows seniors to take a mortgage on
their home under which they can draw funds in a variety of
ways – upfront, monthly or intermittently as they choose –
with no repayment obligation so long as they reside in their
HECM program would not exist without Federal Government
support. The lenders who advance funds to the seniors are
guaranteed repayment by the FHA while virtually all of the
HECMs that are written are securitized, with the securities
guaranteed by GNMA. In an environment of severe budgetary
stringency, a question arises as to whether this program is
worthy of Federal Government support? At various times in
the past, legislators have introduced
legislation that would kill the program.
The case for support has
six arguments. The first is that the HECM is unique in converting illiquid housing wealth into spendable funds while allowing continued occupancy by the owner. The only close substitute is the private reverse mortgage programs that emerged after the HECM program and were modeled on it. These programs targeted owners of high-priced homes, offering loan amounts that exceeded the HECM limits, though at higher prices. These programs disappeared during the financial crisis and have reemerged only recently.
The second argument is that the HECM program generates what economists term “positive externalities”, which are benefits to society that are not enjoyed by the private firms involved in the activity. By providing a facility for converting illiquid housing wealth into spendable funds, the program reduces the burden on public services of various types that are directed toward seniors in need. In addition to Medicaid, these include single purpose loan programs directed toward home repair and property taxes that are offered by many states and municipalities; and a variety of services offered through the Aging Network, such as senior centers, in-home care and nutrition support that are financed by the Federal Government. The argument gains increasing force as the number of homeowners retiring without adequate income increases while their life spans also grow longer.
The third argument for supporting HECMs is that they offer senior homeowners living primarily off investments insurance against a type of risk that is becoming increasingly important: the risk of outliving their financial assets. They insure against this risk by taking a HECM line of credit when they retire, allowing it to grow over time with market interest rates. The line is tapped in later years if it is needed, otherwise their unused equity reverts to their estate. This kind of insurance is not available in the private market.
The fourth argument is that a Government program is needed as a model for private programs. The private programs that now exist were modeled on the HECM program, including numerous safeguards to protect seniors from rapacious lenders. Perhaps the most important of these is the requirement that, prior to any contractual agreement, all borrowers must be counseled by an independent third party not connected to the lender. Without the HECM model, it is very unlikely that such a safeguard would have evolved.
The fifth argument for supporting the HECM program is that the program is self-funding through the collection of insurance premiums from HECM borrowers.
HUD is mandated to make the program self-supporting, which it can do by manipulating insurance premiums and adjusting program rules to curb transactions that pose excessive risk. In 2013 the Senate passed The Reverse Mortgage Stabilization Act of 2013, which gives HUD additional authority “to improve the fiscal safety and soundness” of the HECM program.
The arguments for the HECM program are not arguments against having private reverse mortgages available in the market. The best state of affairs would be to have both, as is the case with standard (forward) mortgages.
The sixth argument for the HECM program, perhaps the most important, is that the inclusion of HECMs in retirement plans along with financial asset management and annuities generates important synergies, including higher payments to retirees during their life. This is discussed in Integrating the Components of a Retirement Plan.