Have you heard any of these statements?
“The age of HECM borrowers has plummeted in the last four fiscal years.”
“Thousands of seniors have been helped by HECMs.”
“Case number assignments have been doing so well in the last few months, endorsements are bound to get better”
“About half of all HECMs have terminated by now.”
“The average lifespan of a HECM is five years.”
If you’re in this business, there’s no doubt you have heard
at least one of these. This article examines the underlying facts behind these statements using HUD’s September 2012 HECM Characteristics Report and Single Family Outlook Report, both of which are available on HUD’s website. As reverse mortgage experts, we all need to have a definite command of reverse mortgage facts.
Is the age of HECM borrowers really “plummeting”?
NRMLA seems to think so. In the September/October 2012 issue of the association’s Reverse Mortgage magazine, under the headline “Market Gets Younger,” the following was stated:
“A study released by the MetLife Mature Market Institute and National Council on Aging, or NCOA, suggests the age of reverse mortgage borrowers has plummeted in the four years since the collapse of the housing market, attracted national press coverage and appears to be altering the perception that reverse mortgages should only be viewed as a loan of last resort.”
A NRMLA blog entry from April 2012, titled “Welcome Financial Planners,” reiterated facts from the MetLife study to support this belief:
“The MetLife Mature Market Institute… shows a vast increase in the number of people 62-64 taking reverse mortgages and thus a corresponding decrease in the average age of reverse mortgage borrowers…”
Indeed, the Mature Market Institute’s collaborative study with the National Council on Aging (NCOA) did purport that HECM borrower data illustrates a drastic decline in the age of seniors using the product. A March 2012 press release from the institute about the report stated the following:
“A comprehensive new study from the MetLife Mature Market Institute shows the age of those seeking Home Equity Conversion Mortgages (HECMs), popularly known as reverse mortgages, has plummeted in the four years since the collapse of the housing market in the U.S.”
Yet the collaborative made no such claim. Note that the cover date of this study is August 2011. Its central findings about the age of counselees come from three months of FIT program counseling data gathered in late 2010 by NCOA. Notice that the data does not actually span the four-year period in which the study suggests ages have plummeted.
So we’ve heard from NRMLA and the Mature Market Institute, but what does HUD say about the trend toward younger HECM borrowers? The department’s September HECM Characteristics Report provides data on the average age of the youngest borrower for HECMs endorsed during a fiscal year from 1990 to present.
So where is the average age of the youngest borrower “plummeting” during any four-year period? The table above shows that in 1990 the average age was 76.7 and that that number has gradually trended down without a noticeably drastic drop. In 22 years the average age has decreased less than five years with an average drop of 0.22 years per fiscal year. The most drastic change in age from the previous four years occurred in 2004 and 2005, during which a 1.7 decline was noted. At no time since fiscal year 2005 has the average age drop during any four-year period been greater than 1.3 years. From 2008 to 2012, one can clearly see evidence of gradual decline, but again, not drastic plummeting.
With the aging of the boomer generation, the population has seen a massive shift in the senior demographic—there are more seniors in their 60s and early 70s than ever before and a greater proportion of them when compared to all those 62 and older. It would make sense that HECM data reflect this shift. The trend in the average age of the youngest HECM borrower seems to be following the trend reflected in the general population. Census data, however, is not available on a year-by-year basis; exact counts are only made once a decade. Comparing the downturn in the average age of the senior population to the downturn in the average age of the youngest HECM borrower on a year-by-year basis would be an interesting presentation.
The following graph displays the average age of the youngest borrower using the table at left. It clearly shows that the greatest drops in age in a single fiscal year occurred during 1993 at 0.9 years and 2003 at 0.8 years, and illustrates a continuous downward trend in age since 2000.
The following graph shows the change in the average age of the youngest borrower on both a fiscal-year basis as well as a four-year basis. The graph illustrates that on a fiscal-year basis, the change in age has never been greater than one year and that on a four-year basis the drop has never reached two years.
So why does everyone seem to be promoting the idea that the average age of the youngest borrower has plummeted in the past four years? HUD’s facts do not match the claim nor does the MetLife study reflect that idea since its research is restricted to three months in late 2010 and has a cover date of August 2011 (months before fiscal year 2011 even ended).
There is no question that the average age of the youngest borrower has been dropping, particularly since fiscal year 2000, but “plummeting” in any single year or any four-year period just has no basis in fact.
Has the HECM program helped just thousands of seniors?
The industry has endorsed more than 778,000 HECMs since the start of the program, according to the September HECM Characteristics Report. That means we have not just helped thousands but hundreds of thousands of seniors age 62 and older. Perhaps by the end of fiscal year 2016, we can talk about helping more than one million.
Do current case number assignments mean increased endorsement numbers this year?
Do not get your hopes up for this fiscal year. The endorsements for the four months prior to November 30, 2012, are a little more than 16,000, which projects to a little more than 48,000 on an annualized basis. The total case numbers assigned in the four months prior to September 30, 2012, will be by far the largest contributor to endorsements from October 2012 to January 2013 than applications from any other months. The total is more than 7 percent lower than the same period last fiscal year, and total endorsements for October and November 2012 are more than 12 percent lower than the total endorsements for October and November 2011.
Total endorsements for October 2012 were the worst seen for any month in years. Many lenders blamed the reduction on disruptions caused by Hurricane Sandy. Some lenders believe that the superstorm will significantly lower endorsement conversions for this fiscal year. With the 12-month window to assign case numbers that will convert into endorsements during this fiscal year already half over, this looks to be another year with less than 70,000 endorsements and with several signs pointing to less than 50,000.
Of course, one must then wonder what Congress and FHA will actually implement to mitigate losses from HECMs and defaults from nonpayment of taxes and insurance. No one is expecting their actions to increase endorsements for this fiscal year. One wonders if endorsements for this fiscal year could actually slip under 40,000 for the first time in nine years.
Have more than 50 percent of all HECMs been terminated?
The HECM Characteristics Report also shows more than 595,000 HECMs are still active and have not terminated as of September 30, 2012. That means in 23 years only about 183,000 or less than 24 percent of all HECMs ever endorsed have terminated. In fact, less than 3 percent (or about 20,500) terminated last fiscal year.
Is the average lifespan of a HECM just five years?
The weighted average lifespan of the 20,459 HECMs that terminated this fiscal year is calculated to be 4.9 years (using a half-year convention). The last year that saw more than 50 percent of HECMs endorsed terminate in the same year was 2004. That means it currently takes the average HECM more than eight years to terminate.
The weighted average age of all active HECMs as of September 30, 2012, (again using a half-year convention) was just more than four years.
Over the next four years, there should be a sharp increase in the number of HECMs terminating each year as we are beginning to see terminations from our peak endorsement years (which will continue for the next four years), and because of foreclosures due to nonpayment of taxes and insurance. Many believe that at the same time, the lifespan of the average active HECM will continue to grow.
Do not confuse the time that the average fixed-rate HECM is held in HMBS with its lifespan. Most fixed-rate HECMs will not be held in a security for more than five years. Under the HMBS agreement, lenders are required to purchase a HECM when the balance due reaches 98 percent of the maximum claim amount, at which point a HECM is eligible for assignment. In most cases, a fixed-rate HECM reaches the assignment level within five years of funding. However, assignment does not result in termination. Many HECMs remain active long after reaching assignment.
Currently, borrowers whose HECMs are still active seem more reluctant to terminate their HECMs than in the past. That in itself says a lot about HECM borrower satisfaction.
Conclusion
This article could only touch on some of the information that can be derived from online HECM reports. A command of the data available to us is an excellent way to obtain a clear picture of the state of our industry. I hope that HUD will expand the information it provides the public, including data on HECMs in default and those in assignment, so that we can learn more about the product we promote.
