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model to simulate the net present values of insurance premiums and claim costs under multiple program design features. Innovations from our initial design recommendations, which FHA adopted, included the first-ever two-part premium structure for an FHA program (two percent upfront and 50 basis points annual), a two-dimensional “principal limit” factor table (by borrower age and interest rate) that is used as an effective limit on HECM LTVs [loan-to-values], and formulas for borrowers to set up their own customized payment plans—allow-
ing maximum flexibility in choice among monthly payment streams, lines of credit or combination plans with both. These HECM design features that we developed are still in use today. The HUD Appropriation Act of 1998 made HECM a permanent program of HUD, based upon the early successes of the pilot program. HUD’s work in HECM design underscores the fact that sometimes government can get it right. HUD accomplished this by assembling a design team of its own staff, including myself, along with extensive
consultation with external stakeholders. My contribution was to propose an actuarial pricing and simulation model, and to provide clarity to some of the financial structure of the product. This means the development of the principal limit table, itself, and in establishing formulas for computing borrower cash draws from the principal limit. I also assisted in software development and early program implementation as well as initial program evaluation reports to Congress. What attracted me to the team was the opportunity to apply mathematical models to the problem of managing risk for a new reverse mortgage product. I have an educational background in mathematics and a love for solving mathematical problems of an applied nature.
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Controls: Better manage our collective risk and eliminate fraud. Excellence: Create, promote and adhere to industry-leading standards of excellence. Efficiency: Develop capabilities that drive greater efficiency and ease of use between our companies. Together, we will lead the way, helping to establish a foundation for a stronger, healthier and more responsible industry. Share in this vision. For more information, tools, ideas and market insights visit our Shared Vision, Shared Success.SM web site located on www.brokersfirst.com.
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This information is for use by mortgage professionals only and should not be distributed to or used by consumers or other third-parties. Information is accurate as of date of printing and is subject to change without notice. Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A. © 2009 Wells Fargo Bank, N.A. All Rights Reserved. #64153 4/09
“In some sense, the HUD HECM product is the envy of the world ... it is the ‘gold standard.’” —Edward J. Szymanoski How has the product and the industry changed, and where do you see HECM and the industry going in the years ahead? During the past 20 years (most of which I have spent working at HUD, except for a two-year stint at the Office of Federal Housing Enterprise Oversight [OFHEO], now the Federal Housing Finance Agency [FHFA]), I have seen the HECM product change from a limited pilot program to a nationwide niche market product, and then to a near mainstream product. I say near mainstream product because there is yet more work to improve the efficiency of the secondary market for HECM to the point where it provides as much liquidity and efficiency of execution as does the secondary market for standard prime mortgages (current market problems notwithstanding). For most of the 20-year period, HECM relied on the liquidity provided by one investor, Fannie Mae. Fannie Mae played a key and valuable role in the early success of HECM. However, if HECM is to become a truly mainstream financial product, a sustainable, competitive secondary market is essential. Ginnie Mae, which began guaranteeing HECM MBSs [mortgage-backed securities] in 2007, has already made great strides toward achieving this goal. In my view as a researcher, there is also need for more formal research on the benefits of HECM to borrowers and to society as a whole. This type of research will better enable us to retool HECM for the coming wave of retirements of the large baby boom cohorts over the next two decades. For example, in what ways are older homeowners better off from having taken out a HECM? Is society as a whole better off with a mainstream HECM product? These and other research questions will ultimately need to be answered in order to guide HECM policy changes in the future. What were the design assumptions you started with as a team, and have they been validated by market experience? The major design assumptions involve: 1. The timing of loan terminations due to mortality, voluntary move-out or refinancing into a new HECM; 2. The mean and volatility of home price appreciation; and 3. The projections of loan balances into the future based on variable interest rates and borrower cash drawdown patterns. The answer to your question as to whether these assumptions have been validated by experience is an ongoing one. We are learning more and more, with each passing year, about these continued on page 15