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The Mortgage Professor: Should Government Support HECMs?

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By Jack Guttentag

The fourth argument for HECMs is that a government program is needed as a model for private programs. The private programs that existed prior to the financial crisis were, indeed, modeled after 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. Some would dispute this because a recent actuarial review of the financial status of FHA’s HECM insurance fund showed a deficit. However, estimates of fund value swing around from one year to the next based on forecasts of property values and interest rates, the volume of future business, and changes in program rules.

The recent elimination of the standard fixed-rate program, for example, has eliminated the segment of the HECM market that has resulted in the largest losses.

The critical point is that 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. On July 30, 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.

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