This 2000 Report leaves many of the same questions unanswered as did the 1995 Report due to a lack of relevant data. For example:
• Is the mortality rate the right bench mark for termination rates?
• Do elderly homeowners continue to maintain the houses so that the house value appreciates close to the area average rate?
• How accurate is the expected interest rate in predicting future rates?
• How often do borrowers change payment plans and for what reasons?
Answers to the above questions, which ultimately affect the ability of the Department to be effective in managing the HECM program, will require steps to collect additional data now. Below is a list of key data items that need to be collected for a more reliable and comprehensive actuarial review.
Interest Rates. The current IACS data field for interest rates appears to have a mixture of current and original contract rates. Given that nearly all the HECM loans are adjustable rate mortgages, it is
consider is to record the original rate as distinct from the most recent update. The underlying actuarial model assumed that the expected (10-year) interest rate would be the appropriate proxy for interest rate over the long run. Better information about current rates being charged by lenders will make it possible in the future to test accurately whether that assumption needs to be adjusted or not.
House Price Information. Currently there is no method for capturing the sales value of the house securing the HECM loan. The original actuarial model assumed a 4 percent house value
appreciation rate over the long run. During the 1990s, this appreciation rate has been exceeded in many areas, but a 3 percent rate seems more sustainable in the future. Moreover, it is an open question whether borrowers with little equity will continue to maintain their property even as their health deteriorates. Since the size of a HECM claim depends on the difference between the house value and the outstanding balance at the time of sale, any small, persistent deviation from the assumed property appreciation rate can result in large differences in net worth of a book of business. A useful, but costly, way to get better information on how homes entering the HECM program actually appreciate would be for the Department to require some post-cleaning inspections by servicers. This does not seem practical. Another less costly approach would be to require servicers to report the actual sales price when the home is ultimately sold to pay off the loan. To gain broad cooperation from servicers, there might have to be an incentive payment. At a minimum, sales data should be required for claims other than assignment.
Cause of Termination. Nearly 50 percent of the terminations have “cause unknown” for the reason of termination. The original actuarial model assumed that the termination rate would exceed the mortality rate by 30 percent. Knowing the cause of termination would make it possible to know whether the mortality rate is the appropriate benchmark. Early evidence presented below suggests that terminations are much higher for younger borrowers, which may mean that a constant
percentage above the mortality rate is not the best approach. Better information on the cause of termination would enhance the investigation of HECM terminations. An “exit” survey might also be valuable in providing information on customer satisfaction as well as a more thorough understanding of the factors motivating termination other than mortality.
Partial Repayments. The data extract from IACS for this study did not include information on repayments, but the information could be obtained for subsequent studies. Responses from the focus groups suggested that partial repayments are occasionally made. Small repayments are recorded in the IACS system by reducing the balance amount for the 2 percent up-front mortgage insurance premium. This seems like an odd approach, which does not highlight the amount of repayment over the life of the loan. A comparison of 2 percent of the maximum claim amount and the loan balance for initial fee shows that nearly 8 percent of the active loans have made partial repayments and nearly 3 percent have made repayments exceeding 2 percent of the maximum claim
amount. A separate field accumulating the partial repayments over the life of the loan would allow future evaluations to easily investigate the extent of partial repayments by HECM borrowers.
Payment Plan Changes. The IACS system only records the current payment plan, yet a
borrower can change plans at any time and many do, sometimes more than once. Models to date, including this one, assume very little switching of payment plans. Even if we had a clear idea of what motivates plan switching, it is unlikely that we will develop information sources on the income and health of the borrowers to accurately predict plan changes. Nevertheless, we should track the changes made in sufficient detail to recognize the common patterns. With this basic information, we could test the impact of plan changing on the actuarial value of the insurance fund. This would be better than the current assumption that such changes have no impact, which may or may not be true. At the least, IACS should record the original payment plan, the date of change and the type of new plan through the first three changes.
Vague Transaction Codes. Transaction codes are brief descriptions in the data files that
designate various types of charges and advances to the borrowers account. The current transaction codes in IACS are too vague to distinguish the types of advances charged to the borrower’s
account at closing, such as closing costs and origination fees versus payments that the borrower could spend. A common reaction by borrowers is that the “closing costs” for HECMs are very high. Unfortunately, it is not possible with IACS data to do much of an analysis of closing costs because the transaction codes do not identify them. This seems like a relatively simple matter of requiring lenders to report separate codes for the type of advance or fee charged at closing. A related issue is the estimation of borrower equity which could be verified if payments for existing liens were identified.
Income Status of Borrowers Unknown. There is no systematic source of income information, which makes it impossible to measure the degree of improved financial status of borrowers due to HECM.65 Borrower focus groups provide anecdotal evidence that HECMs do enhance the financial well-being of borrowers, but it is difficult to determine how many borrowers use HECM payments to defray living expenses. Line of credit is, by far, the dominant form of payment plan, which seems to indicate that borrowers do not rely heavily on regular HECM payments to pay for living costs. However, most LOC borrowers take very large advances in their first year of the loan. HECM credit may be more important to the wealth, than the income, of borrowers.
65
The CHUMS data contain an item for borrower’s annual total income. However, tabulations from the database reveal that the variable is mostly filled with missing or zero values. This probably reflects the fact that filling out the corresponding information is not mandatory in the HECM application process and most participants simply did not