$3.3 Billion of FHA Reverse Mortgages Underwater

As reported by Reverse Mortgage Daily, April 25, 2011: Roughly 93,000 HECM loans, or 17.2% of the Federal Housing Administration’s reverse mortgage loans outstanding, are underwater by $3.3 billion total, according to analysis released today from New York, N.Y.-based New View Advisors.
The estimate is based on recent data from Department of Housing and Urban Development, which includes all HECM loans originated through January 2011.

The $3.3 billion figure compares loan balance to property value, New View explains, but does not account for property disposition cost. More accurately reflecting the situation, New View offers scenarios factoring in 10% and 15% haircut amounts, leading to estimates of 135,000 loans (24.9% outstanding) underwater by $4.9 billion and 166,000 loans (30.6% outstanding) underwater by $6.1 billion, respectively.

“HECM loans originated from 2005 through 2008 comprise substantially all of these underwater loans. In the 10% haircut scenario, they account for 91% of the underwater loans,” New View’s analysis says. “The 2006 and 2007 vintages are the worst offenders: each accounts for about 30% of the problem loans.”

The total underwater proportion of HECM loans at estimates between 17.2% and 30.6% compares with a recent report from CoreLogic, which estimates 23.1% of all forward mortgages are underwater.

The numbers will get worse before they get better, New View predicts. During the time over which the loans will pay off, growing loan balances and borrower advances, especially if combined with slow prepayments and a down housing market, will make the underwater problem worse, the analysis says. The underwater estimates represent how much FHA would lose if the loans paid off immediately, rather than over the next few years.

New View estimates the total value of outstanding HECM loans through January 2011 to be approximately $76 billion, and that about $7.3 billion negative net present value for the program since its inception, with the vast majority of the damage coming from the 2005-2008 HECM loan cohorts.

“If there is good news in all this,” New View says, “it is that the reverse mortgage industry has already undergone the painful process of reform, including reducing loan-to-value ratios (principal limits) and weaning itself off Fannie Mae….FHA’s FY 2012 budget predicts a modest surplus from newly originated HECM loans; this is a plausible estimate reflecting a more conservative HECM program.”

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Last Minute Budget Deal Eliminates Funding for HUD Counseling Program

Funding for the Department of Housing and Urban Development’s counseling programs has been cut as a result of legislation scheduled to pass Congress this week.

Made as part of a last minute deal to avoid a government shutdown, the FY 2011 Continuing Appropriations Act (H.R. 1473) removes all ($88 million) funding from the agency’s counseling programs. The cuts will have a big impact on seniors interested in reverse mortgages, since HUD guidelines require borrowers go through HECM counseling before moving forward with the loan.

“This unique counseling helps older homeowners understand the costs, benefits, and risks associated with these loans,” said Barbara Stucki, vice president for Home Equity Initiatives at National Council of Aging. “Without this funding, the older Americans who can least afford it may have to pay for this critical advice out-of-pocket.”

As a result of grants made available by HUD to counseling agencies, many seniors were able to obtain this counseling at no cost. However, without the funding, seniors will be required to pay for the counseling out of their own funds.

As one of the eight national HECM counseling intermediaries, NCOA said the loss of the funding will also impact counselors’ ability to help reverse mortgage borrowers who are in default and at risk of foreclosure.

“In these difficult economic times, people have to increasingly tap their home equity to make ends meet,” said Stucki. “This new budget proposal is a major setback and increases the financial vulnerability of all older adults looking to use their home to stay at home.”

There are about 2,800 HUD-approved agencies throughout the country, which provide a range of services to millions of homeowners and prospective homebuyers free of charge. About half of the counseling sessions provided in 2010 were dedicated to helping those facing foreclosure, according to HUD. A spokesperson for the agency confirmed with RMD that all counseling funding has been cut but the agency had no statement at press time.

“The de-funding of counseling is an example of the numerous items that American rely upon that are being cut in this extraordinary budget environment, yet few people really know about at this point,” said Peter Bell, president of the National Reverse Mortgage Lenders Association in an email to RMD.

“While I don’t know if it will have any impact with so many programs being cut, I would urge all reverse mortgage industry participants to call your Representative’s office TODAY and tell them that you are concerned about the adverse impact of cutting counseling funds while we’re trying to overcome a housing crisis.”

Meg Reilly, a spokeswoman for the Office of Management and Budget, told ProPublica, “these were very tough choices to make.”

Reilly pointed out that the agreement had left intact a $65 million fund devoted to counseling for foreclosure avoidance. Advocates said that fund has not come close to meeting the demand of homeowners facing foreclosure. NeighborWorks, which administers the fund, requested $113 million for 2011 but received just over half that amount.

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