Reverse Mortgages: Policy Changes Have Had Mostly Positive Effects on Lenders and Borrowers, but These Changes and Market Developments Have Increased HUD's Risk
Published: 2009-07-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: A reverse mortgage is a loan that converts the borrower’s home equity into  payments from a lender and typically does not require any repayment as  long as the borrower continues to live in the home. Available to  homeowners aged 62 and older, these loans have become an increasingly  popular financial tool for seniors. Almost all reverse mortgages are  currently made under the Home Equity Conversion Mortgage (HECM)  program administered by the Federal Housing Administration (FHA) of the  Department of Housing and Urban Development (HUD). FHA insures  lenders against losses on these mortgages, and charges borrowers  insurance premiums to cover anticipated insurance claims. The number of  HECMs made has grown rapidly in recent years, rising from 157 loans in  fiscal year 1990 to more than 112,000 loans in fiscal year 2008.
The Housing and Economic Recovery Act of 2008 (HERA) made several  modifications to the HECM program. The first of these changes affects  he  the origination fees that borrowers pay for these loans. Prior to HERA, t origination fee was 2 percent of the “maximum claim amount”—the lesser  of the home value or the HECM loan limit. HERA changed the fee  calculation to 2 percent of the maximum claim amount up to $200,000 plus  1 percent of the maximum claim amount over $200,000 with a maximum  fee of $6,000. In conjunction with this change, HUD increased the  minimum origination fee from $2,000 to $2,500 to ensure that lenders  retain an incentive to continue to serve borrowers living in lower-valued  properties. The second of these changes affects the program’s loan limit,  the maximum loan amount that HUD can insure. Specifically, HERA  established a national loan limit for HECMs, which was set at $417,000—a  level substantially higher than the county-based limits that existed prior to  HERA.
In light of these changes, HERA contains a mandate for GAO to evaluate  the impact of HERA’s provisions on the availability of credit under the  HECM program, the cost to borrowers participating in the program, and  the program’s financial soundness. As agreed with your offices, this report  examines (1) how HERA’s changes to the 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) HUD’s actions to evaluate the financial  performance of the HECM program, including the potential impact of loan  limit and house price changes.
To address these objectives, we reviewed laws, regulations, and guidance  relevant to the HECM program, including provisions in HERA and the  American Recovery and Reinvestment Act of 2009 (ARRA). We also spoke  with agency, industry, and nonprofit officials, including those at HUD,  Ginnie Mae, Fannie Mae, AARP, the National Reverse Mortgage Lenders  Association (NRMLA), and the Mortgage Bankers Association (MBA)  about the implications of the HERA changes. In addition, to determine  how HERA’s provisions have affected lenders’ planned participation in the  reverse mortgage market we conducted a survey of a representative  sample of lenders that originated 10 or more HECMs in fiscal year 2008.  The survey included questions about lenders’ plans to offer reverse  mortgages, resources dedicated to their HECM business, consumer  demand for HECMs, and margin rates for HECMs. We received responses  from 57 percent of the lenders we surveyed. In general, the estimates we  made from our survey results had margins of error of plus or minus 10  percentage points at the 95 percent confidence interval. To determine the  extent to which HERA’s changes to HECM origination fees and loan limits  have affected costs to borrowers and the loan amounts available to them,  we reviewed rules for determining borrower costs and loan amounts. We  also obtained and analyzed loan-level data from HUD on HECM loans and  borrowers, which we determined to be reliable for the purposes of this  report. We compared the actual up-front costs and loan funds available to  borrowers who obtained HECMs in 2007 to what their costs and available  loan funds would have been under the HERA provisions. To examine  HUD’s actions to evaluate the financial performance of the HECM  program, we reviewed HUD budget estimates, financial statements, and  actuarial reviews for the HECM program, as well as other analyses the  agency has conducted of program costs. We also reviewed HUD Office of  the Inspector General (OIG) audits of FHA’s financial statements.  Additionally, we reviewed federal agency standards for managing credit  programs, such as those contained in the Federal Credit Reform Act  (FCRA), related Office of Management and Budget requirements and  instructions, and Federal Accounting Standards Advisory Board guidance.  Finally, we interviewed FHA officials, HUD OIG officials, industry  participants, and mortgage market analysts.
We conducted this performance audit from September 2008 through July  2009, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. A more extensive  discussion of our scope and methodology appears in appendix I.
subsections: section_title: Background
paragraphs: A reverse mortgage is a loan against the borrower’s home that the  borrower does not need to repay for as long as the borrower meets certain  conditions. These conditions, among others, require that borrowers live in  the home, pay property taxes and homeowners’ insurance, maintain the  property, and retain the title in the borrower’s name. Reverse mortgages  typically are “rising debt, falling equity” loans, in which the loan balance  increases and the home equity decreases over time. As the borrower  receives payments from the lender, the lender adds the principal and  interest to the loan balance, reducing the homeowner’s equity. This is the  opposite of what happens in forward mortgages, which are characterized  as “falling debt, rising equity” loans. With forward mortgages, monthly loan  payments made to the lender add to the borrower’s home equity and  decrease the loan balance (see fig. 1).
There are two primary types of reverse mortgages, HECMs and proprietary  reverse mortgages. The Housing and Community Development Act of 1987  (P.L. 100-242) authorized HUD to insure reverse mortgages and  established the HECM program. According to industry officials, HECMs  account for more than 90 percent of the market for reverse mortgages.  Homeowners aged 62 or older with a significant amount of home equity  are eligible, as long as they live in the house as the principal residence, are  not delinquent on any federal debt, and live in a single-family residence. If  the borrower has any remaining balance on a forward mortgage, this  generally must be paid off first (typically, taken up-front from the reverse  mortgage). In addition, the condition of the house must meet HUD’s  minimum property standards, but a portion of the HECM can be set aside  for required repairs. The borrower makes no monthly payments, and there  are no income or credit requirements to qualify for the mortgage. Lenders  have offered non-HECM, or proprietary, reverse mortgages in the past, but  these products have largely disappeared from the marketplace due, in  part, to the lack of a secondary market for these mortgages. Typically,  proprietary reverse mortgages have had higher loan limits than HECMs but  paid out a lower percentage of the home value to borrowers.
The volume of HECMs made annually has grown from 157 loans in fiscal  year 1990 to more than 112,000 loans in fiscal year 2008. The HECM  program has experienced substantial growth, as the number of HECMs  insured by FHA has nearly tripled since 2005 (see fig. 2).
Additionally, the potential liability of loans insured by FHA has doubled in  the last 2 years (see fig. 3). The potential liability is the sum of the  maximum claim amounts for all active HECMs since the program’s  inception.
Finally, recent years have seen a rapid increase in the number of lenders  participating in the HECM program (see fig. 4). However, the bulk of  HECM business is concentrated among a relatively small percentage of  lenders. In fiscal year 2008, roughly 80 percent of all HECMs were  originated by fewer than 300 lenders, or about 10 percent of HECM  lenders.
Lenders can participate in the HECM market through wholesale or retail  channels. Wholesale lenders fund loans originated by other entities,  including mortgage brokers and loan correspondents. Retail lenders  originate, underwrite, and close loans without reliance on brokers or loan  correspondents. Most lenders participate in the HECM market through  retail lending, although some participate through the wholesale process,  and a few have both a retail and wholesale HECM business.
There is a secondary market for HECMs, as most lenders prefer not to  hold the loans on their balance sheets. Fannie Mae has purchased 90  percent of HECM loans and holds them in its portfolio. In 2007, Ginnie  Mae developed and implemented a HECM Mortgage Backed Security  product, in which Ginnie Mae-approved issuers pool and securitize a small  proportion of HECMs. Fannie Mae and Ginnie Mae’s involvement in the  HECM secondary market helps to provide liquidity so that lenders can  continue offering HECM loans to seniors.
The amount of loan funds available to the borrower is determined by  several factors (see fig. 5).
First, the loan amount is based on the “maximum claim amount,” which is  the highest sum that HUD will pay to a lender for an insurance claim on a  particular property. It is determined by the lesser of the appraised home  value or the HECM loan limit. In the past year, Congress has raised the  HUD loan limit for HECMs twice: HERA established for the first time a  national limit for HECMs, which was set at $417,000. As a result of ARRA,  the national limit was raised again to $625,500 through December 31, 2009.  Prior to HERA, the loan limit for HECMs varied by location and generally  were set at 95 percent of the local area median house price.
Second, to manage its insurance risk, HUD limits the loan funds available  to the borrower by applying a “principal limit factor” to the maximum  claim amount. HUD developed a principal limit factor table using  assumptions about loan termination rates—which are influenced by  borrower mortality and move-out rates—and long-term house price  appreciation rates, and indexed the table by (1) the borrower’s age and (2)  the expected interest rate—the 10-Year Treasury rate plus the lender’s  margin. The lender determines which factor to use by inputting the  borrower’s current age and the current interest rate information. The older  the borrower, the higher the loan amount; the greater the expected  interest rate of the loan, the smaller the loan amount.
Third, the funds available to the borrower are further reduced by a  required servicing fee set-aside and by the up-front costs (which include a  mortgage insurance premium and the origination fee), because borrowers  can choose to finance them. HUD allows lenders to charge up to $35 as a  monthly HECM servicing fee. The lender calculates the servicing fee set- aside by determining the total net present value of the monthly charged  servicing fees that the borrower would pay between loan origination and  when the borrower reaches age 100. The set-aside limits the loan funds  available but is not added to the loan balance at origination. If borrowers  choose to finance up-front costs as part of the loan, the loan funds  available are reduced by these costs.
10 yr.
Borrowers incur various costs when obtaining a HECM. HUD allows  borrowers to finance both up-front and long-term costs through the loan,  which means they are added to the loan balance.
Origination fee: Prior to HERA, HECM borrowers were charged an  origination fee equal to 2 percent of the maximum claim amount with a  minimum fee of $2,000. Since the implementation of HERA, HECM  borrowers are charged an origination fee calculated as 2 percent of the  maximum claim amount up to $200,000 plus 1 percent of the maximum  claim amount over $200,000, with a maximum fee of $6,000 and a  minimum fee of $2,500.
Mortgage insurance premium: Borrowers are charged an up-front  mortgage insurance premium equal to 2 percent of the maximum claim  amount. While the maximum claim amount is always higher than the initial  amount a borrower can receive in HECM payments from the lender, FHA  charges the mortgage insurance premium based on this amount because  the loan balance (with accumulated interest and fees) could exceed the  amount a borrower receives in payments and potentially reach the  maximum claim amount. Additionally, borrowers are charged a monthly  mortgage insurance premium on their loan balance at an annual rate of 0.5  percent.
Interest: Borrowers are charged interest, which generally includes a base  interest rate plus a fixed lender margin rate, on the loan balance. Lenders  can offer HECMs with fixed, annually adjustable, or monthly adjustable  base interest rates. The adjustable rates can be tied to either the 1-Year  Constant Maturity Treasury Rate or 1-Year London Interbank Offered Rate  Index. Most HECMs have adjustable interest rates.
HECM counseling fee: The HECM program requires prospective  borrowers to receive counseling to ensure an understanding of the loan.  HUD allows counseling providers to charge borrowers up to $125 for  HECM counseling.
Loan servicing fee: Borrowers pay a monthly servicing fee of up to $35.
Closing costs: HECMs also have other up-front closing costs, such as  appraisal and title search fees.
FHA’s insurance for HECMs protects borrowers and lenders in four ways.  First, lenders can provide borrowers with higher loan amounts than they  could without the insurance. Second, when the borrower is required to  repay the loan to the lender, if the proceeds from the sale of the home do  not cover the loan balance, FHA will pay the lender the difference. Third,  if the lender is unable to make payments to the borrower, FHA will assume  responsibility for making these payments. Fourth, if the loan balance  reaches 98 percent of the maximum claim amount, the lender may assign  the loan to FHA and FHA will continue making payments to the borrower  if the borrower has remaining funds in a line of credit or still is receiving  monthly payments. To cover expected insurance claims, FHA charges  borrowers insurance premiums, which go into an insurance fund. HECM  loans originated since the inception of the program through 2008 are  supported by FHA’s General Insurance and Special Risk Insurance Fund,  which includes a number of FHA mortgage insurance programs for single- family and multifamily housing and hospitals. Pursuant to HERA, FHA  moved the HECM program and other insurance programs for single-family  housing into FHA’s Mutual Mortgage Insurance Fund.
FCRA requires federal agencies that provide loan guarantees to estimate  the expected cost of programs by estimating their future performance and  reporting the costs to the government in their annual budgets. Under  credit reform procedures, the cost of loan guarantees, such as mortgage  insurance, is the net present value of all expected cash flows, excluding  administrative costs. This is known as the credit subsidy cost. For loan  guarantees, cash inflows consist primarily of fees and premiums charged  to insured borrowers and recoveries on assets, and cash outflows consist  mostly of payments to lenders to cover the cost of claims. Annually,  agencies estimate credit subsidy costs by cohort, or all the loans the  agency is committing to guarantee in a given fiscal year. The credit subsidy  cost can be expressed as a rate. For example, if an agency commits to  guarantee loans totaling $1 million and has estimated that the present  value of cash outflows will exceed the present value of cash inflows by  $15,000, the estimated credit subsidy rate is 1.5 percent. When estimated  cash inflows exceed estimated cash outflows, the program is said to have  a negative credit subsidy rate. When estimated cash outflows exceed  estimated cash inflows, the program is said to have a positive credit  subsidy rate—and therefore requires appropriations.
Generally, agencies are required to produce annual updates of their  subsidy estimates—known as re-estimates—of each cohort based on  information about the actual performance and estimated changes in future  loan performance. This requirement reflects the fact that estimates of  subsidy costs can change over time. Beyond changes in estimation  methodology, each additional year provides more historical data on loan  performance that may influence estimates of the amount and timing of  future claims. Economic assumptions also can change from one year to  the next, including assumptions on home prices and interest rates. FCRA  recognized the difficulty of making subsidy cost estimates that mirrored  actual loan performance and provides permanent and indefinite budget  authority for re-estimates that reflect increased program costs.
section_title: Most HECM Lenders View the Overall Effect of the HERA Provisions as Neutral or Positive for Their Reverse Mortgage Business
paragraphs: 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. Other factors have had varying  influences on lenders’ planned participation. 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. Finally,  the HERA changes have not influenced most lenders’ plans to offer  proprietary—non-HECM—products.
subsections: section_title: HERA’s Changes and Other Factors Have Had Varying Effects on Lenders’ Planned Participation in the HECM Market
paragraphs: HERA’s changes to the HECM program have had varying effects on HECM  lenders’ planned participation in the HECM market. On the basis of  questionnaire responses from a random sample of HECM lenders, we  estimate that for 50 percent of lenders, the combined effect of these  changes has had an upward influence on their plans to start or continue to  offer HECMs (see fig. 6). 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. Some industry participants we interviewed stated that the  changes were a good compromise that benefited borrowers by limiting the  origination fee and increasing the loan limit, thereby increasing the money  borrowers could receive from a HECM. Additionally, officials at NRMLA  and MBA said the changes benefited lenders by making the product more  attractive to individuals with higher-value homes.
Taken separately, the two HERA provisions have had differing effects on  lenders’ plans to offer HECMs. We estimate that for about 70 percent of  lenders, HERA’s increase in HECM loan limits has had an upward  influence on the likelihood of offering HECMs. The loan limit increase has  had little to no influence on almost all of the remaining lenders’ plans to  offer HECMs. We estimate that 86 percent of lenders expect that HERA’s  creation of a single national loan limit of $417,000 will somewhat or greatly  increase consumer demand for HECMs.
Although the increase in the loan limit has generally had an upward  influence on lenders’ plans, the change to the calculation of the origination  fee has had a different effect. We estimate that changing how the fee is  calculated has had a downward influence on plans to offer HECMs for 22  percent of HECM lenders, little to no influence for 65 percent of lenders,  and an upward influence for 11 percent of lenders. Consistent with these  views, 65 percent of lenders expect the change in origination fee to have  no effect on consumer demand for HECMs. An estimated 26 percent of  lenders expect the change in the origination fee to increase consumer  demand, while only a few lenders expect the change to decrease consumer  demand.
We estimate that only 2 percent of HECM lenders do not plan to continue  to offer HECMs. Of the respondents in our sample, three lenders indicated  that they did not plan to continue offering HECMs. None of these were  large HECM lenders, as they each originated from 40 to 160 HECMs in  fiscal year 2008. Each of these lenders participated in the HECM market  solely through their retail business. These three lenders varied in the  amount of time that they have offered the HECM product. A representative  of one lender indicated that HERA’s changes to the loan limits and  origination fee had a great upward influence on the likelihood that it  would offer HECMs, but nonetheless planned to discontinue offering  HECMs. The other two lenders indicated that HERA and other economic  factors had little to no influence on their decision to discontinue offering  HECMs, and one of these lenders noted on the survey that it had  discontinued offering HECMs before the enactment of the HERA.
As part of our survey, we asked lenders how various economic and  legislative factors influenced their plans to start or continue offering  HECMs. Two factors had an upward influence on most lenders’ plans to  offer HECMs in 2009. For an estimated 67 percent of HECM lenders, the  implementation of the HECM for Purchase program (authorized by HERA)  has had an upward influence on their plans to offer HECMs, and it has had  little to no influence on almost all of the remaining lenders’ HECM  origination plans. Some industry participants told us that the HECM for  Purchase program likely will make HECMs attractive to a broader range of  seniors. Additionally, current economic conditions have had an upward  influence on the plans to offer HECMs for about 52 percent of lenders.  NRMLA officials explained that seniors are seeking additional revenue  because they have less available income from traditional sources, such as  interest and dividend payments and retirement accounts, which is partially  attributable to poor economic and financial market conditions.  Additionally, two other factors have had an upward influence on some  lenders’ plans to offer HECMS. For about one-third of lenders, both (1)  reduced opportunities in the forward mortgage market and (2) HERA’s  prohibition on the participation of non-FHA approved entities in the  origination of HECMs has had a moderate or great upward influence on  their plans to offer HECMs.
In contrast, three factors had more of a downward influence on some  lenders’ planned participation in the HECM market. First, we estimate  from our survey that house price trends have had a downward influence  on the HECM origination plans of 38 percent of lenders; however, house  price trends had little or no influence on plans for about 50 percent of  lenders. Some industry participants told us that the recent decline in  house prices has prevented some seniors from obtaining a HECM either  because they lack the equity in their home to qualify for the loan, or  because they would not receive enough funds from the HECM to have any  cash remaining after they deduct HECM fees and pay off any existing  mortgage debt.
Second, we estimate that the availability of secondary market options has  had a downward influence on the plans of about one-third of lenders to  offer HECMs. The secondary market for HECMs plays an important role in  maintaining availability of loans because lenders prefer not to hold  HECMs on their balance sheets. There are currently two primary options  in the secondary market—Fannie Mae and Ginnie Mae.
Fannie Mae officials stated that Fannie Mae bought and held more than 90  percent of HECMs in its portfolio in 2008 and was the principal secondary  market purchaser of HECM loans. However, Fannie Mae’s regulator—the  Federal Housing Finance Agency—recently required it to reduce the  mortgage assets it holds in portfolio. Fannie Mae officials told us that as a  result, they are making changes to their HECM business, which will attract  other investors to the secondary market for HECMs, in order to decrease  their share of the market. Recently, Fannie Mae lowered the price it pays  lenders for HECMs and implemented a “live pricing” system that requires  lenders to commit to the volume of HECMs they will sell to Fannie Mae.  We estimate that approximately 90 percent of lenders viewed secondary  market pricing requirements and the transition to live pricing as important  factors in recent margin rate increases on HECMs. Fannie officials  explained that as the price they pay lenders for HECMs falls, the margin  rate the lenders charge the consumers generally increases. Some lenders  we surveyed noted that margin rate increases stemming from pricing  changes could make HECMs less attractive to borrowers because they  would not be able to obtain as much cash from their HECM. Some  lenders noted that live pricing complicates their relationship with  borrowers because the interest rate can change between loan application  and closing, which may result in the senior being able to receive less  money from their HECM than originally quoted.
Ginnie Mae developed and guarantees a HECM Mortgage Backed Security  (HMBS) that aims to expand the availability of HECMs from multiple  lenders, reduce borrowing costs, and create a broader secondary market  for HECM loans. Ginnie Mae officials stated that they were poised to take  on extra volume in the HECM secondary market by guaranteeing  securities issued by lenders. AARP officials noted that Ginnie Mae’s HMBS  product could help introduce competition into the secondary market for  reverse mortgages, lowering margin rates for seniors. However, industry  participants point to several issues with the Ginnie Mae product that could  limit its appeal to lenders. First, Ginnie Mae requires HMBS issuers to buy  back the HECM when the loan balance reaches 98 percent of the loan’s  maximum claim amount.  Second, issuers are required to pay interest  shortfalls to investors when the loan is terminated mid-month. Some  HECM lenders have noted that both of these provisions expose them to  extra risk on the loan, as compared to the alternative of selling the HECM  outright as they had when selling to Fannie Mae.
Third, for an estimated 29 percent of lenders, HERA’s prohibition on  lender-funded counseling has had a downward influence on plans to offer  HECMs. Industry participants said that this prohibition is a problem for  the HECM industry because counseling is required for borrowers to obtain  a HECM, but borrower-paid counseling can be a deterrent for seniors who  are still deciding if they want a HECM, or for those who have limited  financial means to pay for counseling. In contrast to these comments, we  estimate that the prohibition on lender-funded counseling had little or no  influence on the plans of 60 percent of lenders.
Our survey of HECM lenders asked about two other factors—HERA’s  restrictions on selling other financial products in conjunction with HECMs  and the current availability of wholesale lending partners—that could  influence lenders’ plans to start or continue to offer HECMs. In general,  these factors had little or no influence on lenders’ plans (see fig. 6).
section_title: HERA Has Not Influenced Most Lenders’ Plans to Offer Non-HECM Reverse Mortgages
paragraphs: In 2008, several non-HECM reverse mortgages—referred to as jumbo or  proprietary reverse mortgages—were available in the marketplace.  Proprietary reverse mortgages offered loan limits that were greater than  the HECM loan limit. For example, Financial Freedom, a large reverse  mortgage lender, offered a product called the Cash Account Advantage  Plan, which was not subject to the HECM loan limits, and in some cases  provided more cash than a HECM to borrowers with higher-value homes.  Based on our survey results, we estimate that approximately 43 percent of  HECM lenders made non-HECM reverse mortgages in 2008. However,  towards the end of 2008, almost all of the non-HECM reverse mortgage  products were withdrawn from the market due to the lack of a secondary  market to support them. Nonetheless, from our survey results, we estimate  that 36 percent of HECM lenders plan to offer a non-HECM reverse  mortgage in 2009.
We estimate that HERA’s changes to the calculation of the origination fee  and loan limit have had little or no influence on 68 percent of lenders’  plans to originate non-HECM reverse mortgages (see fig. 7). However, for  an estimated 29 percent of HECM lenders, HERA’s change to the loan  limits has had an upward influence on their plans to offer non-HECM  reverse mortgages. Additionally, we estimate that for 32 percent of  lenders, the implementation of the HECM for Purchase program had an  upward influence on their plans to offer these loans. We estimate that  current economic conditions have had an upward influence on plans to  offer non-HECM reverse mortgages for 29 percent of lenders, little to no  influence for 34 percent of lenders, and a downward influence for 17  percent of lenders. Our survey of HECM lenders asked about several other  factors (see fig. 7) that could influence lenders’ plans to offer a non-HECM  reverse mortgage product in 2009. Generally, these factors have had little  or no influence on lenders’ plans. Our survey results did not indicate that  secondary market conditions had a downward influence on the plans of  most lenders. However, several lenders we interviewed said that while  they hoped to offer a non-HECM reverse mortgage in 2009, their ability to  do so would depend on the availability of funding in the secondary market.
section_title: HERA Provisions Will Affect Borrower Costs and Loan Amounts Differently Depending on Home Value and Other Factors
paragraphs: 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. HERA’s changes to HECM  origination fees and loan limits are likely to change the up-front costs  (origination fee and up-front mortgage insurance premium) and the loan  funds available for most new borrowers. 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. Additionally, about 28 percent of  HECM borrowers in 2007 would have seen an increase in maximum claim  amount due to HERA’s increase in loan limit, which would have meant  more loan funds available for nearly all of these borrowers. Borrowers  also may be affected by other consequences of the HERA provisions, such  as margin rate increases and changes to funding of HECM counseling.
subsections: section_title: HERA Provisions Will Change Up-front Costs for Many Borrowers
paragraphs: The net effect of the HERA provisions on an individual borrower’s total  up-front costs depends on house value, the local loan limit prior to HERA,  and the new loan limit. HECM up-front costs consist primarily of the up- front mortgage insurance premium and the origination fee, both of which  are calculated as a proportion of the maximum claim amount. Most  borrowers are likely to see changes in origination fees due to HERA.  Generally, those with house values greater than the prior HECM loan limit  in their area will see changes in the up-front mortgage insurance  premium.  Borrowers fall into two categories, based on whether their  maximum claim amount changes:    Maximum claim amount does not change: For borrowers whose houses  are valued at or less than the prior HECM loan limit in their area, the  maximum claim amount does not change. Therefore, for these borrowers,  the mortgage insurance premium (which is calculated based on the  maximum claim amount) also does not change. However, the origination  fee may change depending on the value of the house. A borrower whose  house is valued at less than $125,000 should expect up to a $500 increase  in the up-front costs due to the increase in the minimum origination fee  from $2,000 to $2,500. A borrower whose house is valued at $125,000 to  $200,000 would see no change in the up-front costs because they would  pay the same 2 percent of the maximum claim amount (the same as before  HERA). A borrower whose house is valued at greater than $200,000 would  expect a decrease in up-front costs due to the decreased origination fee  for amounts greater than $200,000 and the fee cap of $6,000. For an  example, see borrower D, whose house value is $300,000, in table 1.
Maximum claim amount increases: For borrowers whose maximum  claim amount increases because their house values are greater than the  prior local HECM loan limit, the change to up-front costs is more complex.  All borrowers in this category will pay more in up-front mortgage  insurance premiums because premiums are calculated based on the entire  maximum claim amount. However, some borrowers may pay more in  origination fees, while others will pay less. When combining these two  costs, the total up-front costs could increase, decrease or remain the same.  For example, borrowers A, B, and C in table 1 each own houses valued at  $300,000 that are located in counties in which prior HECM loan limits  varied from $200,000 to $290,000. Each borrower would see different  effects in up-front costs.
See appendix III for a more complete explanation of how up-front costs  will change for borrowers with different characteristics.
section_title: Most 2007 HECM Borrowers Would Have Paid the Same or Less in Up-front Costs under the HERA Provisions, and Most Borrowers Would Have Had the Same or More Loan Funds Available
paragraphs: To illustrate the potential effect of the HERA provisions on borrowers, we  compared the actual maximum claim amounts, up-front costs (origination  fee plus the up-front insurance premium), and loan funds available for  HECM borrowers in 2007 to what their maximum claim amounts, up-front  costs, and loan funds available would have been had the HERA provisions  been in place. Overall, we found that nearly 27 percent of borrowers  would have paid more in up-front costs, 46 percent would have paid less,  and 27 percent would have paid the same (see fig. 8). 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).
Our analysis of up-front costs broken down by its two components is as  follows:    Origination fees: About 24 percent of 2007 borrowers would have paid  more in origination fees, 49 percent would have paid less, and 27 percent  would have paid the same amount. Increases in origination fees were due  either to the $500 increase in the minimum origination fee (about 17  percent of all borrowers) or to the increased loan limits (about 6 percent  of all borrowers). Borrowers who would have paid less in origination fees  had maximum claim amounts greater than $200,000, which means they  would have benefited from the decrease in the origination fee for the  portion of the maximum claim amount greater than $200,000, the $6,000  origination fee cap, or both.
Up-front mortgage insurance premium: Twenty-eight percent of 2007  HECM borrowers would have paid more in up-front mortgage insurance  premiums due to increases in the loan limit, while 72 percent of borrowers  would have paid the same amount, generally because the size of their  loans was limited by the value of their homes and not the HECM loan  limit.
Changes in the loan limits and up-front fees would have affected the loan  funds available to most 2007 borrowers. Borrowers whose maximum claim  amount would have increased because of an increase in loan limit would  have paid a higher up-front mortgage insurance premium, regardless of  how much of their available loan funds they chose to access. Because this  analysis assumed that HECM borrowers financed the up-front costs in the  loan, any increase or decrease in the up-front costs affects the amount of  loan funds that are available to them. Our analysis—which assumes that  borrowers financed their up-front costs—shows that had the HERA  provisions been in place at origination for 2007 HECMs, approximately 56  percent of borrowers would have had more loan funds available, 17  percent would have had less loan funds available, and 27 percent would  have had the same amount available (see fig. 8).    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.
Additionally, figure 8 shows the number of 2007 borrowers within the  various categories and figure 9 shows the average changes in up-front  costs and loan funds available for each category of borrower. Borrowers  with the largest increases in their maximum claim amounts on average  would have the largest percent increases in up-front costs (see fig. 9).  Borrowers with no increase in their maximum claim amount, who have a  change to up-front costs, will have a corresponding change in loan funds  available that are equal in size but opposite in direction. For example a  borrower with a $200 decrease in up-front costs will have a $200 increase  in loan funds available and a borrower with a $300 increase in up-front  costs will have a $300 decrease in loan funds available.
section_title: Borrowers May Be Affected by Other Factors, Such as Lender Margin Rates and Counseling Fees
paragraphs: Increased lender margin rates stemming from HERA’s change to the  origination fee calculation could reduce loan funds available to borrowers.  At loan origination, the expected interest rate HUD uses to determine the  portion of the maximum claim amount that will be made available to the  borrower includes the 10-year Treasury rate plus the fixed lender margin  rate. Our survey of HECM lenders indicates that some lenders have raised  their margin rates modestly to compensate for HERA’s limitations on the  origination fee; however, we did not receive a sufficient number of  responses to reliably estimate the median increase in margin rate for the  population. To illustrate the impact of a modest increase in margin-rate  on borrowers, we applied a 0.25 percentage point increase to borrowers  who took out HECMs in 2007. We found that these borrowers would have  seen a 3 percent average decrease in loan funds available as a result of the  higher margin rate. A comparison of HUD data on HECMs originated  within the first 3 months of HERA’s implementation with data from the  same 3 months from the prior year indicates that average margin rates  were higher after HERA but that the overall average HECM expected  interest rates were essentially the same. This outcome resulted from  declines in 10-year Treasury rates offsetting increases in lender margin  rates.
In addition, more borrowers, as well as prospective borrowers who  ultimately do not obtain a HECM, may need to pay counseling fees.  Provisions in HERA prohibit lenders from paying for this counseling but  allow HUD to use a portion of HECM mortgage insurance premiums for  this purpose. HUD officials said that they have not exercised this authority  because the resulting reduction in premium income would affect the  subsidy rate of the program adversely and potentially require  appropriations. Because HUD did not implement this provision, more  borrowers and prospective borrowers may need to pay counseling fees  themselves. For borrowers who do eventually obtain a HECM, the fee can  be financed in the loan. Prospective borrowers who do not qualify for a  HECM or who choose not to proceed with the loan after counseling may  have to pay for counseling out of pocket. HUD’s recent announcement that  it will provide approximately $8 million in grant funds for HECM  counseling in 2009 may mitigate any negative impact the HERA changes  may have on seniors’ ability to obtain HECM counseling.
section_title: 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
paragraphs: HUD has taken or planned steps to enhance its analysis of the HECM  program’s financial performance. However, HUD’s recent estimates of  program costs indicate weaker performance than previously estimated,  primarily due to more pessimistic assumptions about long-term house  price trends. Additionally, higher loan limits enacted under HERA and the  American Recovery and Reinvestment Act of 2009 (ARRA) could increase  HUD’s financial risk.
subsections: section_title: HUD Is Taking Steps to Improve its Analysis of the HECM Program’s Financial Performance
paragraphs: To estimate the cost of the HECM program, HUD uses a model to project  the cash inflows (such as insurance premiums paid by borrowers) and  cash outflows (such as claim payments to lenders) for all loans over their  expected duration. HUD’s model is a computer-based spreadsheet that  incorporates assumptions based on historical and projected data to  estimate the amount and timing of insurance claims, subsequent  recoveries from these claims, and premiums and fees paid by borrowers.  These assumptions include estimates of house price appreciation, interest  rates, average loan size, and the growth of unpaid loan balances. HUD  inputs its estimated cash flows into OMB’s credit subsidy calculator,  which calculates the present value of the cash flows and produces the  official credit subsidy rate for a particular loan cohort. A positive credit  subsidy rate means that the present value of the cohort’s expected cash  outflows is greater than the inflows, and a negative credit subsidy rate  means that the present value of the cohort’s expected cash inflows is  greater than the outflows. To budget for a positive subsidy an agency must  receive an appropriation. HUD also uses the cash flow model to annually  estimate the liability for loan guarantees (LLG), which represents the net  present value of future cash flows for active loans, taking into account the  prior performance of those loans. HUD estimates the LLG for individual  cohorts as well as for all cohorts combined. The LLG is a useful statistic  because unusual fluctuations in the LLG can alert managers to financial  risks that require further attention.
HUD in recent years has enhanced its cash flow model for the HECM  program. In 2007, the HUD Office of Inspector General’s (OIG) annual  audit of FHA’s financial statements cited a material weakness in the cash  flow model FHA used to generate credit subsidy estimates for the HECM  program. Among other things, the audit noted technical errors in the  model, significant discrepancies between projected and actual cash flows,  and a lack of supporting documentation for certain modeling decisions.  Partly in response to the OIG audit, HUD made a number of improvements  to both the model and its supporting documentation, and in 2008 the HUD  OIG eliminated the material weakness. For example, HUD improved the  methodology it uses for its cash flow model. In the past, HUD used  historical averages for termination and recovery rates for projecting cash  flows. In 2008, HUD began to incorporate forecasts of national house price  appreciation and interest rates from IHS Global Insight, an independent  source for economic and financial forecasts, into its modeling.  Additionally, HUD improved the way it estimates the growth of unpaid  principal balances, which HUD uses to calculate the LLG. In the past, HUD  used both active and terminated loans to generate this estimate. Since  2008, HUD has included only active loans to generate this estimate, which  is more appropriate because the LLG represents the expected future cash  flows of currently active loans. HUD also developed a master database of  loan-level information to support the HECM cash flow model. Previously,  HUD staff had to draw on data from multiple sources, which increased the  chance of analytical errors. Finally, HUD made a number of enhancements  to its documentation of estimation processes, including how  macroeconomic projections are incorporated into the cash flow model.
HUD plans to subject the HECM program to an annual actuarial review,  which should provide additional insight into the program’s financial  condition. Such a review would likely assess if program reserves and  funding were sufficient to cover estimated future losses, as well as the  sensitivity of this analysis to different economic and policy assumptions.  Historically, the HECM program has not had a routine actuarial review  because it was supported by the General Insurance and Special Risk  Insurance Fund (GI/SRI) Fund, which does not have such a review  requirement. However, as of fiscal year 2009, the HECM program is in the  Mutual Mortgage Insurance (MMI) Fund, which is statutorily required to  receive an independent actuarial review each year and includes FHA’s  largest mortgage insurance program. HUD officials told us that future  actuarial reviews of the MMI Fund will include a separate assessment of  the HECM program.
HUD also is considering producing credit subsidy re-estimates for the  HECM program. As discussed later in this report, HUD has generated  credit subsidy estimates for individual HECM cohorts for several years.  However, HUD officials told us that, until recently, they did not have the  data necessary to produce subsidy re-estimates for HECMs. Specifically,  the officials noted that for HECM cohorts prior to 2009, assets for HECMs  were aggregated with assets from other programs in the GI/SRI Fund and  not accounted for separately. HUD officials said that they are now  accounting for HECM assets separately, which will enable them to  produce re-estimates for the HECM program. Re-estimates can highlight  cohorts that are not expected to meet original budget estimates. This  information could help inform future actions to manage HUD’s insurance  risk and control program costs.
section_title: Prior Cost Estimates Indicated That the HECM Program Was Profitable but Current Estimates Forecast Losses, Primarily Due to Revised House Price Assumptions
paragraphs: HUD’s most recent estimates of two important financial indicators for the  HECM program—the credit subsidy rate and the LLG—suggest weaker  financial performance than previously estimated, largely due to more  pessimistic house price assumptions. 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.  Analyses by HUD have found that the financial performance of the HECM  program is sensitive to long-term trends in house prices. HUD officials told  us that HECM program performance is less sensitive to short-term price  declines because borrowers with HECMs, unlike those with traditional  forward mortgages, do not have an incentive to terminate (or default on)  their loans when prices fall.
HUD has made credit subsidy estimates for HECM cohorts from 2006  forward. Because the HECM program was relatively small prior to 2006,  HUD did not produce separate subsidy estimates for the HECM program  but included HECMs in its estimates of subsidy costs for the GI/SRI Fund  as a whole. For the 2006 through 2009 HECM cohorts, HUD estimated  negative subsidy rates ranging from - 2.82 percent in 2007 to -1.37 percent  in 2009 (see fig. 10). However, for the 2010 cohort, HUD estimated a  positive subsidy rate of 2.66 percent. Because HUD is expecting to insure  about $30 billion in HECMs in 2010, this rate corresponds to a subsidy cost  of $798 million. As required by the Federal Credit Reform Act, the  President’s budget for fiscal year 2010 includes a request for this amount.
HUD officials told us that the positive subsidy rate for fiscal year 2010  largely was due to incorporating more conservative assumptions about  long-term house price trends than had been used for prior cohorts. For  budgeting purposes, the Administration decided to use more modest  appreciation rates than the private sector forecasts HUD typically uses.  Specifically, the house price appreciation rates used were 0.5 percent  greater than the forecasted inflation rates. HUD officials told us that if  they had used IHS Global Insight projections to develop the fiscal year  2010 credit subsidy estimate, there would be no need for an appropriation  because the credit subsidy rate would be negative.
HUD also has estimated the LLG for the HECM program since 2006. As  shown in figure 11, HUD’s original LLG estimates grew substantially from  2007 to 2008, increasing from $326 million to $1.52 billion. According to  FHA’s financial statements for fiscal years 2007 and 2008, the increase was  primarily due to the lower house price appreciation projections used in the  2008 analysis. The report noted that lower appreciation rates result in  lower recoveries on mortgages assigned to HUD, which in turn increases  HUD’s liability.
In September 2008, HUD analyzed the sensitivity of the 2008 LLG estimate  for the HECM program as a whole to different assumptions, including  alternative house price scenarios. HUD examined the impact of house  price appreciation that was 10 percent higher and 10 percent lower than  the baseline assumptions from IHS Global Insight for fiscal years 2009  through 2013. (For example, for a baseline assumption of 4 percent house  price appreciation, the lower and higher scenarios would have been 3.6  percent and 4.4 percent, respectively.) HUD estimated that the more  pessimistic assumption increased the LLG from $1.52 billion to $1.78  billion, while the more optimistic assumption reduced the LLG to $1.27  billion.
section_title: HUD Uses a Conservative Approach in Estimating Program Costs, but Higher Loan Limits May Increase the Potential for Losses
paragraphs: When estimating future costs for all HECMS, HUD assumes that the  property value at loan origination is equal to the maximum claim amount.  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. According to HUD, because of this  conservative approach to estimating costs, the HECM program does not  rely on loans with property values that exceed the maximum claim amount  to operate on a break-even basis over the long-run.
Higher loan limits enacted under HERA and ARRA may make HUD’s  approach less conservative by reducing the proportion of loans for which  the property value exceeds the maximum claim amount. This scenario is  especially likely in locations that previously had relatively low local loan  limits (reflecting their lower home values) but are now subject to the  higher national limit. To illustrate, consider a 65-year-old HECM borrower  with a $400,000 home whose loan limit prior to HERA was $250,000 (see  fig. 12). In this scenario, the maximum claim amount would be the same as  the loan limit because the maximum claim amount is defined as the lesser  of the loan limit or the home value. However, if the loan limit for the same  borrower is increased to the HERA-authorized level of $417,000, the  maximum claim amount is the same as the home value ($400,000). As  figure 12 shows, when a borrower’s maximum claim amount is capped by  the loan limit, the maximum claim amount can be substantially lower than  the value of the home. All other things being equal, the potential for losses  is low in this scenario because the projected loan balance is likely to  remain less than the projected home value after the lender assigns the loan  to HUD. In contrast, when the maximum claim amount is capped by the  home’s value, the difference between the projected loan balance and the  projected home value is smaller. The potential for losses is higher with  such a loan because the projected loan balance is more likely to exceed  the projected home value. As also shown in figure 12, when this effect is  combined with declining home prices, the potential for losses increases.
Studies by HUD and others have noted that HECM loans for which the  home value exceeds the maximum claim amount have a positive impact on  the program’s financial performance but also have noted the potential  negative impact of raising the loan limit. When the HECM program started  in 1990, HUD developed a statistical model to estimate borrower payments  and insurance risk. HUD’s technical explanation of the model  acknowledges that future expected losses are smaller for HECMs with a  maximum claim amount capped by the loan limit, as compared with  HECMs with a maximum claim amount equal to the home value.  Similarly, actuarial reviews of the HECM program—conducted in 1995,  2000, and 2003—concluded that the negative net liability of the HECM  program resulted from homes valued at more than the HECM loan limit  cross-subsidizing those valued at less than the limit. The 2003 actuarial  review also examined how the financial condition of the HECM program  would have been affected had a higher, national loan limit been in place  when existing HECMs were originated. The analysis found that the higher  loan limits would have reduced the expected net liability of the HECM  program from -$54.0 million to -$11.4 million. This finding is consistent  with a Congressional Budget Office (CBO) analysis of a 2007 legislative  proposal to increase the HECM loan limit to $417,000 nationwide. CBO  concluded that the increase would reduce HUD’s credit subsidy rate for  the 2008 cohort of loans from -1.9 percent to -1.35 percent.
The percentage of HECMs with maximum claim amounts capped by the  loan limit has declined in recent years (see fig. 13). Since the inception of  the program, this percentage has ranged from 24 percent to 47 percent.  However, this proportion has declined in recent years, dropping from 42  percent in fiscal year 2006 to 25 percent in fiscal year 2008. Furthermore,  HUD data show that this proportion dropped to 18 percent for the first 4  months of fiscal year 2009, likely due in part to the higher loan limit.
HUD officials acknowledged that a reduction in the proportion of loans  with maximum claim amounts capped by the loan limit could have a  negative effect on the program’s financial performance. However, they  also indicated that their conservative approach to estimating program  costs mitigates the associated risks.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to HUD for its review and comment. In  comments provided to us in an e-mail, HUD concurred with our report and  provided a technical comment, which we incorporated into the report.
We are sending copies of this report to interested congressional parties,  the Secretary of the Department of Housing and Urban Development, and  other interested parties. In addition, the report will be available at no  charge on our Web site at http://www.gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. If you or your staff has any questions about this  report, please contact me at (202) 512-8678 or sciremj@gao.gov. GAO  contact information and staff acknowledgments are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
To address these objectives, we reviewed laws, regulations and guidance  relevant to the HECM program, including provisions in HERA, the  American Recovery and Reinvestment Act of 2009 (ARRA), and HUD  handbooks and mortgagee letters. We also spoke with agency, industry,  and nonprofit officials, including those at HUD, Ginnie Mae, Fannie Mae,  the National Reverse Mortgage Lenders Association (NRMLA), the  Mortgage Bankers Association (MBA), and AARP.
To determine how HERA’s provisions have affected lenders’ planned  participation in the reverse mortgage market, we spoke with industry and  nonprofit officials—including those at Ginnie Mae, Fannie Mae, AARP,  NRMLA, and MBA—to understand how recent legislative and economic  changes were affecting the industry. To more specifically identify the  influence of legislation and economic factors on HECM lenders, we  conducted a Web-based survey of a random probability sample of the  2,779 lenders that originated HECMs on a retail basis in fiscal year 2008.  We used HUD records of HECM-certified lenders making at least one such  loan in fiscal year 2008, and supplemented HUD’s loan company officer  contact information with names and e-mail addresses of officers at those  lenders in our sample who also had memberships in NRMLA. For the  remaining sampled lenders for which we lacked contact information, we  made telephone calls to identify the most appropriate recipient for our  survey invitation.
We drew a stratified sample, allocating our selections across three groups  defined by the number of HECMs made in fiscal year 2008, sampling from  the groups with larger lenders at a higher rate than from the groups with  smaller lenders (see table 2). We sampled all 51 members of the stratum  with the largest lenders (300 or more loans). We sampled so few (30) and  received so few usable responses (8) from the stratum with the smallest  lenders (1 to 9 loans), that we considered this a nongeneralizable sample  and excluded it from our quantitative analysis. In addition, lenders in the  smallest lender stratum account for less than 5 percent of all loans, and  thus would not influence overall estimates very much. Responses from the  smallest lenders stratum were used only as case study examples in our  analysis.
To help develop our questionnaire, we consulted with an expert at  NRMLA. We pretested our draft questionnaire to officials at three HECM  lenders in our population and made revisions to it before finalization.  Legal and survey research specialists in GAO also reviewed the  questionnaire.
Before the survey, in early March 2009, NRMLA sent letters to those  lenders in our sample who were also members in that organization,  endorsing our survey and encouraging response. In March 2009, we sent e- mails with links to our Web questionnaire and unique login information to  each member of our sample with valid e-mail addresses. For sampled  companies for which we were unable to obtain working e-mail addresses,  we mailed paper versions of the questionnaires. Nonresponding lenders  were sent additional e-mails or copies of questionnaires from March  through May. We also made telephone calls in April to nonrespondents  encouraging them to respond. Our survey closed in early May 2009. We  received a total of 180 usable responses, for an overall response rate of 57  percent. The “weighted” response rate for the survey, which takes into  account the relative numbers of lenders in the population that sampled  lenders in each of our three size strata had to represent, was 53 percent.  The most common reason for ineligibility among our sample firms was  closure, merger, or other discontinuation of business in the reverse  mortgage industry.
Because we followed a probability procedure based on random selections,  our sample is only one of a large number of samples that we might have  drawn. Since each sample could have provided different estimates, we  express our confidence in the precision of our particular sample’s results  as a 95 percent confidence interval (e.g., plus or minus 10 percentage  points). This is the interval that would contain the actual population value  for 95 percent of the samples we could have drawn. As a result, we are 95  percent confident that each of the confidence intervals in this report will  include the true values in the study population. Unless otherwise noted,  our estimates have margins of error of plus or minus 10 percentage points  or less at the 95 percent confidence interval.
In addition to sampling error, the practical difficulties of conducting any  survey may introduce other errors:  1.  Nonresponse—bias from failing to get reports from lenders whose  answers would have differed significantly from those who did  participate.  2.  Coverage—failure to include all eligible HECM lenders in the list from  which we sampled, or including ineligible firms.  3.  Measurement—errors in response.  4.  Data processing.
We took steps in developing the questionnaire, collecting the data, and  analyzing them to minimize such errors. For example, our pretesting and  expert reviews of the questionnaire resulted in question changes that  reduced the possibility of measurement error, and all data processing and  analysis programming was verified by independent analysts. In addition,  we followed up on some unlikely answers by recontacting sampled  lenders or conducting followup research on them to edit erroneous  answers and declare some firms ineligible for our survey, thereby reducing  measurement and coverage error.
To assess the risk of nonresponse bias, we compared the response rates of  lenders across categories of two characteristics that might be related to  our key variables—the effect of HERA changes and other factors on the  likelihood of continuation of HECM lending in the future. The two  characteristics known for both respondents and nonrespondents were the  number of years the lender had been offering HECMs and the state in  which the lender’s home office is located, from which we could develop a  measure of size of loan activity in each state by summing the number of  loans made by lenders whose home offices were in a given state. We found  no statistically significant association between these two characteristics  and the likelihood of response. Although this does not eliminate the  possibility of nonresponse bias, we found no evidence of bias based on our  analysis of this available data.
To determine the effect of the HERA provisions on HECM borrowers, we  examined changes in the up-front mortgage insurance premium,  origination fee, and loan funds available to borrowers. The up-front  mortgage insurance premium is 2 percent of the maximum claim amount.  HERA did not change this rate, but because of HERA’s change to the  HECM loan limit, some borrowers may be eligible for larger loans and  therefore have higher maximum claim amounts. Since the premium is  calculated based on the maximum claim amount, these borrowers will pay  a higher up-front mortgage insurance premium than they would have prior  to HERA. Before HERA, the origination fee was calculated as 2 percent of  the maximum claim amount with a minimum fee of $2,000. HERA changed  the calculation of the origination fee to 2 percent of the first $200,000 of  the maximum claim amount plus 1 percent of the maximum claim amount  over $200,000, with a maximum fee of $6,000. In implementing HERA,  HUD also increased the minimum origination fee by $500 to $2,500.
We used two different approaches to assess the impact of the HERA  changes. First, we performed a mathematical analysis showing the  difference between the up-front costs before and after HERA. Specifically,  we derived equations for calculating pre-HERA and post-HERA up-front  costs for borrowers with maximum claim amounts in different ranges ($0  to $100,000; $100,000 to $125,000; $125,000 to $200,000; $200,000 to  $400,000; and $400,000 to $625,500). For each range, we subtracted the  pre-HERA equation from the post-HERA equation to derive an equation for  calculating the change in up-front costs due to the HERA provisions. We  then used these equations to calculate the potential change in up-front  costs in dollars terms. We did this analysis separately for cases in which  the maximum claim amount would increase under HERA and cases in  which the maximum claim amount would remain the same. Appendix III  shows the details of this analysis.
Second, we applied the HERA changes to HUD loan-level data for HECMs  that borrowers obtained in calendar year 2007. We compared the results to  the actual up-front costs and loan funds available for these borrowers. To  perform this analysis, we obtained data from HUD’s Single-family Data  Warehouse. We assessed the reliability of these data by (1) reviewing  existing information about the data and the system that produced them,  (2) interviewing HUD officials knowledgeable about the data, and (3)  performing electronic testing of required data elements. We determined  that the data we used were sufficiently reliable for the purposes of this  report. As shown in table 3, the universe of 2007 HECMs used in our  analysis included 101,480 loans. We applied the $417,000 national loan  limit and HERA’s changes to the origination fee calculation to the 2007  HECMs. For each borrower, we calculated the new maximum claim  amount, origination fee, up-front mortgages insurance premium, and loan  funds available under the HERA rules and compared our results to the  actual 2007 values. We summarized our results by calculating the average  changes in these amounts.
To illustrate the potential effect of modest margin rates increases  stemming from HERA’s change to the origination fee calculation, we  applied a 0.25 percentage point increase to the margin rate for the 2007  HECMs adjusted to reflect the HERA provisions. We determined the  resulting changes in the loan funds available to borrowers using HUD’s  table of principal limit factors. To provide perspective on the HERA- related margin rate changes, we compared margin rates from a 3 month  period 1 year prior to the implementation of HERA (November 2007  through January 2008) to the margin rates from the 3 month period after  the implementation of HERA (November 2008 through January 2009).
To examine HUD’s actions to evaluate the financial performance of the  HECM program, we reviewed HUD’s budget estimates for the HECM  program for fiscal years 2005 through 2010. We also compiled and  analyzed financial performance information about the HECM program,  including the liability for loan guarantee (LLG) and credit subsidy  estimates. For example, we examined the Federal Housing  Administration’s (FHA) Annual Management Reports (2005, 2006, 2007,  and 2008), which include FHA’s annual financial statements; HUD Office  of the Inspector General (OIG) audits of FHA’s financial statements (2005,  2006, 2007, and 2008); actuarial reviews of the HECM program (1995, 2000,  and 2003); and Congressional Budget Office cost estimates relevant to the  HECM program. We also reviewed other analyses HUD has conducted of  program costs, such as the sensitivity of estimated cash flows to  alternative economic assumptions. We interviewed FHA officials about  their budget estimates and program analyses. Additionally, we reviewed  information about HUD’s HECM cash flow model, including a technical  explanation of the model published in 1990 and recent changes to the  model. We also reviewed historical house price appreciation rates from  the Federal Housing Finance Agency and projected house price  appreciation rates from IHS Global Insight. To examine the percentage of  HECMs with maximum claim amounts capped by the loan limit, we  analyzed loan-level data on HECMs from HUD’s Single-family Data  Warehouse. As noted earlier, we determined that the data we used were  sufficiently reliable for this analysis. In addition, we reviewed federal  agency standards for managing credit programs, such as those contained  in the Federal Credit Reform Act (FCRA), related Office of Management  and Budget requirements and instructions, and Federal Accounting  Standards Advisory Board guidance. Finally, we interviewed HUD OIG  officials, industry participants, and mortgage market analysts.
We conducted this performance audit from September 2008 through July  2009, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Impact of Loan Limit Increase in the American Recovery and Reinvestment Act of 2009 on HECM Lenders
paragraphs: The American Recovery and Reinvestment Act (ARRA) raised the national  loan limit for Home Equity Conversion Mortgages (HECM) to $625,500  through December 31, 2009. In our survey of HECM lenders, we asked  lenders about the influence the increased loan limit would have on their  likelihood to offer HECMs and non-HECM reverse mortgages (see fig. 14).  Additionally, we asked how they expected consumer demand for HECMs  to increase as a result of the ARRA loan increase (see fig. 15). See figures  14 and 15 for survey questions and estimates based on our survey results.
section_title: Appendix III: Effect of the Housing and Economic Recovery Act of 2008 on Up-front Costs for HECM Borrowers
paragraphs: Home Equity Conversion Mortgage (HECM) borrowers may experience  changes in up-front costs due to the Housing and Economic Recovery Act  of 2008’s (HERA) change to the calculation of the origination fee, the loan  limit, or both. Generally, borrowers with house values greater than the  prior HECM loan limit will be able to borrow more under HERA’s higher  loan limit, while borrowers with a wide range of house values may be  affected by the changes in origination fees.
There are two up-front costs. The first—the up-front mortgage insurance  premium—is 2 percent of the maximum claim amount. The second—the  origination fee—was calculated before HERA as 2 percent of the  maximum claim amount with a minimum fee of $2,000. HERA changed the  calculation of the origination fee to 2 percent of the first $200,000 of the  maximum claim amount plus 1 percent of the maximum claim amount  over $200,000, with a maximum fee of $6,000. In implementing HERA,  HUD also increased the minimum origination fee by $500 to $2,500.
To determine how borrowers would be affected by these changes, we  developed mathematical equations for calculating the up-front costs under  both the HERA and pre-HERA rules. We subtracted the equation for the  pre-HERA rules from the equation for the HERA rules to derive an  equation for the change in up-front costs resulting from HERA. A positive  value indicates that a borrower would pay more under HERA, and a  negative value indicates that a borrower would pay less. Figures 16 and 17  illustrate how these changes affect different categories of borrowers.
Figure 16 shows the results for borrowers who have home values lower  than the previous loan limit. The maximum claim amount is not affected  by HERA’s change in loan limit. Therefore, for these borrowers, changes in  up-front costs derive only from changes in the origination fee.
Figure 17 shows the results of the calculation for borrowers who were  affected by HERA’s increase in loan limit. These borrowers would pay up- front mortgage insurance premiums and origination fees based on a higher  maximum claim amount. However, depending on the maximum claim  amount, the origination fee may have decreased rather than increased. The  net change in up-front costs for this grouping is therefore indeterminable  without knowing the old and new maximum claim amounts.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Steve Westley, Assistant  Director; Anne Akin, Kathleen Boggs, Joanna Chan, Rudy Chatlos, Karen  Jarzynka, John McGrail, Marc Molino, Mark Ramage, Carl Ramirez,  Barbara Roesmann, and Jennifer Schwartz made key contributions to this  report.