Most HECM Lenders View the Overall Effect of the HERA Provisions as Neutral or Positive for Their Reverse Mortgage Business

In combination, HERA’s changes to the HECM loan limit and origination  fee calculation have had a positive to neutral influence on most lenders’  plans to start or continue offering HECMs. Current economic conditions  have had a moderate upward influence on lenders’ plans; however,  secondary market conditions have had a downward influence on about  one-third of lenders’ plans to start or continue offering HECMs. For 42 percent of lenders, the combination of  HERA’s changes to the origination fee and loan limits for the HECM  program have had little to no influence on their plans to offer HECMs,  while for 8 percent of lenders, HERA’s changes have had a downward  influence. Proprietary reverse mortgages offered loan limits that were greater than  the HECM loan limit. 7) that could influence lenders’ plans to offer a non-HECM  reverse mortgage product in 2009. HERA Provisions Will Affect Borrower Costs and Loan Amounts Differently Depending on Home Value and Other Factors

HERA’s provisions will affect borrowers in varying ways depending  primarily on home value and whether HERA’s increase in loan limit will  change the maximum claim amount of the loan. Our analysis of data on  borrowers who took out HECMs in 2007 shows that had the HERA  provisions been in place, most borrowers would have paid less or the  same amount in up-front costs, and most would have had more or the  same amount of loan funds available. The amount and  direction of the changes to up-front costs and loan funds available  primarily depended on house value and whether a borrower would have  benefited from an increase in loan limit (about 28 percent of 2007 HECM  borrowers’ homes were valued at more than the prior loan limit and would  have seen their maximum claim amounts increase because of HERA’s  increase in the loan limit). 28 percent of borrowers would have had more loan funds available,  primarily due to the increase in loan limit;    about 28 percent of borrowers would have had more loan funds available  due solely to a decrease in their up-front fees;    17 percent of borrowers would have had a smaller amount of loan funds  available due solely to an increase in their up-front fees; and    27 percent of borrowers would have experienced no change in the amount  of loan funds available because their up-front fees and loan limits  remained the same. HUD Has Enhanced Its Analysis of HECM Program Costs but Changes in House Price Trends and Higher Loan Limits Have Increased HUD’s Risk of Losses

HUD has taken or planned steps to enhance its analysis of the HECM  program’s financial performance. HUD in recent years has enhanced its cash flow model for the HECM  program. HUD plans to subject the HECM program to an annual actuarial review,  which should provide additional insight into the program’s financial  condition. All other things being equal, lower  house price appreciation can increase HUD’s insurance losses because it  makes it less likely that the value of the home will cover the loan balance. For loans in which the property value is more than the HECM loan limit,  this approach results in a conservative assumption about the amount of  home equity available at the end of the loan to cover the loan balance. In  these cases, the actual home value at the end of the loan is likely to be  more than what HUD assumes and therefore more likely to exceed the  loan balance at the end of the loan. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) how the Housing and Economic  Recovery Act of 2008 (HERA) changes to the Home Equity Conversion  Mortgage (HECM) program and other factors have affected HECM lenders’  planned participation in the reverse mortgage market, (2) the extent to  which HERA’s changes to HECM origination fees and loan limits will  affect costs to borrowers and the loan amounts available to them, and (3)  Department of Housing and Urban Development’s (HUD) actions to  evaluate the financial performance of the HECM program, including the  potential impact of loan limit and house price changes.
Why GAO Did This Study

Reverse mortgages--a type of loan against home equity available to seniors--are growing in popularity. A large majority of reverse mortgages are insured by the Department of Housing and Urban Development (HUD) under its Home Equity Conversion Mortgage (HECM) program. The Housing and Economic Recovery Act of 2008 (HERA) made several modifications to the HECM program, including changes in how origination fees are calculated and an increase in the loan limit. The Act directed GAO to examine (1) how these changes have affected lenders' plans to offer reverse mortgages, (2) how the changes will affect borrowers, and (3) actions HUD has taken to evaluate the financial performance of the HECM program. To address these objectives, GAO surveyed a representative sample of HECM lenders, analyzed loan-level HECM data, and reviewed HUD estimates and analysis of HECM program costs.

What GAO Found

On the basis of a survey of HECM lenders, GAO estimates thattaken together, HERA's changes to the HECM loan limit and origination fee calculation have had a positive to neutral influence on most lenders' plans to offer HECMs. Other factors, such as economic and secondary market conditions, have had a mixed influence. Although economic conditions have had a positive influence on about half of lenders' plans to offer HECMS, secondary market conditions have negatively influenced about one-third of lenders. GAO also estimates that the HERA changes have had little to no influence on most lenders' plans to offer non-HECM reverse mortgages. HERA's provisions will affect borrowers in varying ways depending on home value and other factors. The changes to HECM origination fees and loan limits are likely to change the up-front costs and the loan funds available for most new borrowers. GAO's analysis of data on HECM borrowers from 2007 shows that if the HERA changes had been in place at the time, most would have paid less or the same amount in up-front costs, and most would have had more or the same amount of loan funds available. For example, about 46 percent of borrowers would have seen a decrease in up-front costs and an increase in available loan funds. However, 17 percent of borrowers would have seen an increase in up-front costs and a decrease in available loan funds. HUD has enhanced its analysis of HECM program costs, but less favorable house price trends and loan limit increases have increased HUD's risk of losses. HUD has updated its cash flow model for the program and plans to conduct annual actuarial reviews. Although the program historically has not required a subsidy, HUD has estimated that HECMs made in 2010 will require a subsidy of $798 million, largely due to more pessimistic assumptions about long-run home prices. In addition, the higher loan limit enacted by HERA may increase the potential for losses. To calculate the amount of funds available to a borrower, lenders start with a limiting factor of either the home value or, if the home value is greater than the HECM loan limit, with the loan limit. For loans that are limited by the home value, the loan amount and the home value are closer together at the point of origination, which makes it more likely that the loan balance could exceed the home value at the end of the loan. In contrast, for loans that are limited by the HECM loan limit, there is initially a greater difference between the home value and the loan amount, making it less likely that the loan balance will exceed the home value at the end of the loan. The increase in the HECM loan limit may increase HUD's risk of losses by reducing the proportion of loans that are limited by the HECM loan limit.