Home Equity Conversion Mortgage Terminations: Information to Enhance the Developing Secondary Market
42 Pages Posted: 5 Feb 2008
This article examines loan terminations under the U.S. Department of Housing and Urban Development's (HUD's) reverse mortgage insurance program formally known as the Home Equity Conversion Mortgage (HECM). Demand for HECM loans is increasing and may continue to rise in the future as the baby boom generation enters its retirement years. An efficient secondary market would help the HECM program realize its full market potential to meet this growing demand. Information for investors to gauge the future performance of HECM loans has not been widely available but is critical to help the secondary market mature. This article addresses the need for information by analyzing HUD historical data on HECM loan terminations - a major risk factor in assessing loan performance. Reverse mortgage terminations are primarily driven by the timing of borrower deaths and voluntary loan payoffs associated with moving out of the mortgaged property. Thus, borrower age and type (specifically single female or male or couples) affect reverse mortgage termination rates. One unique feature of the HECM program (compared to other reverse mortgage products available in the market) is that it gives lenders the option to assign an active HECM loan to HUD in the event the loan balance reaches the maximum claim covered by FHA insurance. From an investor's perspective, the assignment of an active loan to HUD is the equivalent of a loan termination. The research described in this article generates annual hazard and survival rate tables for HECM loans grouped by age and borrower type and examines the impact assignments have on expected termination experiences for these groups. It finds that assignments begin to impact hazard and survival rates after policy year.
Keywords: Home Equity Conversion Mortgage, HECM, HECM Terminations, Secondary Market
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