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Home Equity Conversion Mortgage (HECM) Definition
A home equity conversion mortgage (HECM), also known as a Reverse Annuity Mortgage is a kind of reverse mortgage indemnified by the Federal Housing Administration (FHA). Home equity conversion mortgages let senior citizens liquidate their held assets by borrowing cash through mortgaging their homes, the value of the loan being conditional on the current appraised value of the property. Also, since this is a strictly senior citizen only arrangement, borrowers need to be at least 62 years old. Although interest rates still apply to the outstanding balance of such loans, no actual repayment is necessary on the part of the borrower. It is only when the borrower dies or the property is sold when the outstanding loan amount needs to be paid in its entirety. However, service and closing fees are still applicable during the term of the loan.
A Little More on What is a Home Equity Conversion Mortgages
As with other reverse mortgages offered by private entities, HECMs are quite common among senior citizens. However, reverse mortgages provided by banks usually permit sanctioning of loans of higher value along with lower fees and other costs. On the other hand, home equity conversion mortgages usually offer lower interest rates. Market competition has resulted in private banks offering borrowers reverse mortgages with offers and conditions that closely match HECMs. It all boils down to the borrower to select a mortgage that is best suited to his/her age, life expectancy and future plans for the property in question.
Seniors also opt for an HECM in lieu of a home equity loan to avoid having to pay monthly installments in the case of the latter type of reverse mortgage.
Eligibility Criteria for an HECM
The Federal Housing Administration not only endorses the HECM but also facilitates insurance coverage of the mortgage. Besides, it also decides the eligibility criteria for the loans and chooses banking partners to disburse them.
The process of approval of a HECM is clear and simple. Approval is subject to the fulfillment of the following preconditions:
1. The borrower must be at least 62 years old at the time of application.
2. The borrower must possess a property that has previous mortgages considerably paid off.
3. The borrower’s financial condition must be sound and he/she should have an amicable risk profile.
4. The property’s collateral value should meet or surpass the minimum acceptable limit as set by the FHA.
References for Home Equity Conversion Mortgage
Academic Research on Home Equity Conversion Mortgage (HECM)
Risk and the home equity conversion mortgage, Szymanoski Jr, E. J. (1994). Real Estate Economics, 22(2), 347-366. This article analyzes the risks involved with reverse mortgage insurance and explains the pricing model developed for the Home Equity Conversion Mortgage (HECM) demonstration. The paper demonstrates how borrower longevity, interest rates and property value changes all affect pricing, and why the HECM model focuses on property value as the primary source of uncertainty.
Is the Home Equity Conversion Mortgage in the United States sustainable? Evidence from pricing mortgage insurance premiums and non-recourse provisions using …, Chen, H., Cox, S. H., & Wang, S. S. (2010). Insurance: Mathematics and Economics, 46(2), 371-384. The purpose of this paper is to build a modeling and pricing framework to investigate the sustainability of the Home Equity Conversion Mortgage (HECM) program in the United States under realistic economic scenarios, i.e., whether the premium payments cover the fair premiums for the inherent risks in the HECM program. The paper proposes a generalized Lee–Carter model with asymmetric jump effects to fit the mortality data, and model the house price index via an ARIMA–GARCH process. The results show that the HECM program is substainable.
Home equity conversion mortgage terminations: Information to enhance the developing secondary market, Szymanoski, E. J., Enriquez, J. C., & DiVenti, T. R. (2007). Cityscape, 5-45. This article examines loan terminations under the U.S. Department of Housing and Urban Development’s (HUD’s) reverse mortgage insurance program formally known as the Home Equity Conversion Mortgage (HECM). The research described in this article generates annual hazard and survival rate tables for HECM loans grouped by age and borrower type and examines the impact assignments have on expected termination experiences for these groups.
Can “high costs” justify weak demand for the Home Equity Conversion Mortgage?, Davidoff, T. (2015). The Review of Financial Studies, 28(8), 2364-2398. This paper shows how Home Equity conversion mortgage’s high cost affect weak demands for loans.
An analysis of default risk in the Home Equity Conversion Mortgage (HECM) program, Moulton, S., Haurin, D. R., & Shi, W. (2015). Journal of Urban Economics, 90, 17-34. The analysis in this paper follows 30,000 seniors counseled for reverse mortgages between 2006 and 2011. The data includes comprehensive financial and credit report attributes, not typically available in analyses of reverse mortgage borrowers. Using a bivariate probit model that accounts for selection, the study estimates the likelihood of tax and insurance default. It also simulates the effects of alternative underwriting criteria and policy changes on the probability of take-up and default.
What the Hecm Is A Reverse Mortgage: The Importance of the Home Equity Conversion Mortgage in an Aging America, Jakubowicz, B. (2016). U. Louisville L. Rev., 54, 183.
The home equity conversion mortgage: A study of attitudes and awareness, Rauterkus, S., Munchus, G., & Slawson Jr, V. C. (2009).. Journal of Real Estate Portfolio Management, 15(3), 267-280. This study surveys senior homeowners to assess their attitudes and awareness regarding the Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM) program. The results of this study indicate that program interest declines with age and varies by geographic region.
The Home Equity Conversion Mortgage: An Overdue Introduction., Salter, J. R. (2014). Journal of Financial Service Professionals, 68(2). This paper suggests that reverse mortgages is a good retirement plaanning strategy worthy of consideration. It also explores the different ways in which the bad media and bias has turned it to a choice of last resort. It also suggests some virtues of reverse mortgages for clients.
HECM Explained: Reverse Mortgages Originated via the Home Equity Conversion Mortgage (HECM) Program, Ziser, B., & Selvidio, J. R. (2010). Reverse mortgages and linked securities: The complete guide to risk, pricing, and regulation, 17-32.