Evaluation of the Home Equity Conversion Mortgage Insurance Demonstration (HECM)
- March 1995
- May 30, 1995
This second evaluation shows encouraging progress in meeting the major three objectives of the HECM Demonstration: to encourage the conversion of home equity to liquid assets, to promote participation in the reverse mortgage market by the private lending community, and to determine the demand for reverse mortgage products. Since the initial HECM evaluation in 1992, the number of HECM loans originated has tripled, and they are now available in 46 States plus the District of Columbia and Puerto Rico. This marked increase in activity reflects the growing familiarity and acceptance of HECM products among borrowers and lenders, the resolution of key legal impediments, and the growing number of qualified lenders and counselors.
One issue not addressed in the initial HECM evaluation was the adequacy of the HECM insurance premium and risk exposure for HUD, and ultimately for the American taxpayers. The results of an independent actuarial analysis indicate a substantial positive net worth for the present value of HECM insurance premiums paid to FHA -- probably the result of the unexpectedly high percentage of borrowers with high-value homes who have taken out HECM loans. Although the assumptions used to conduct the evaluation of premiums will need continued monitoring, no risk-related changes in program design are recommended in the evaluation.
Despite the early successes of the program, FHA still has improvements to make and barriers to overcome. Fannie Mae's participation as the only secondary market for reverse mortgages has been critical to the Demonstration's progress, but long-term involvement by other capital sources such as commercial banks and insurance companies is necessary to ensure the successful development of a conventional reverse mortgage market. Although some Federal and State legal problems remain unresolved, many legal impediments to reverse mortgages have been removed. To protect the interests of borrowers, the Federal Reserve Board has issued new truth-in-lending guidelines that require lenders to make full disclosure to borrowers of the costs related to a HECM loan.
Evaluation of the Home Equity Conversion Mortgage Insurance Demonstration also discusses further improvements to the HECM demonstration and illustrates the initial success of the program in meeting the unique needs of house-rich, cash-poor elderly homeowners.