SOA 2010 Annual Meeting & Exhibit Oct , Session 119 PD, Impact of Housing on Economic Security in Retirement

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1 SOA 2010 Annual Meeting & Exhibit Oct , 2010 Session 119 PD, Impact of Housing on Economic Security in Retirement Moderator: Anna M. Rappaport, FSA, EA, MAAA Presenters: Thomas N. Herzog, ASA Anna M. Rappaport, FSA, EA, MAAA Donald Redfoot, Ph.D.

2 ANNA RAPPAPORT CONSULTING STRATEGIES FOR A SECURE RETIREMENT SM Session 119 Impact of Housing on Security in Retirement by Anna M. Rappaport, F.S.A., M.A.A.A. Society of Actuaries Annual Meeting, 2010 October 2010 Panel members Donald Redfoot, Ph.D., AARP Thomas N Herzog NAIC Thomas N. Herzog, NAIC Anna Rappaport 1

3 A Changing Landscape: The Big Picture Today SOA Annual Meeting -- October Housing in Retirement: Should We? Pay off mortgage and reduce expenses (Think about home equity as cushion for future needs) Sell house and downsize buy new house Sell house and move to apartment or condo Take reverse mortgage Move in with family members Rent all or part of house for income Get second house More to a different area Move to specialized housing independent living, assisted living, nursing home When should we??? SOA Annual Meeting -- October

4 Wealth of Middle Income Households Age 55 to 64 Middle Mass Household Segments (25% to 75% of all households) Married 5.2 million $75,000 $348,000 $240,000 $108,000 69% Single Female 2.5 million $28,000 $111,000 $75,000 $36,000 68% Single Male 1.4 million $41,000 $125,000 $89,000 $36,000 71% Mass Affluent Household Segments (75% to 85% of all Households) Married 1.0 million $132,000 $1,300,000 $884,000 $416,000 68% Single Female.5 million $58,000 $415,000 $299,000 $116,000 72% Single Male.3 million $79,000 $465,000 $349,000 $116,000 75% Note: Financial assets exclude the value of defined benefit pensions and Social Security. Source: Society of Actuaries Segmenting the Middle Market: Retirement Risks and Solutions, SOA Annual Meeting -- October References Analysis based on 2004 Survey of Consumer Finances Est. Non- Non- Household Number of Median Median Net Financial Financial Financial Type Households Income Worth Assets Assets Assets % SOA Housing in Retirement Monograph (2009) g p g wealth/2009/september/mono-2009-mfi09-toc.aspx Coming soon: Roundtable in on Housing in Retirement to be included in Committee on Post-Retirement Needs and Risk Page 3

5 ANNA RAPPAPORT CONSULTING STRATEGIES FOR A SECURE RETIREMENT SM Phone: Fax: SOA Annual Meeting -- October

6 Title text here How Much Has Changed in a Year: Recent Developments in Reverse Mortgages Donald L. Redfoot, Ph.D. Society of Actuaries October 20, 2010 What is a Reverse Mortgage? Loan secured entirely by home equity Provides cash advances to borrower Requires no repayment until the last surviving borrower sells, moves out permanently or dies Generally larger advances the older you are and the more valuable your home Generally, non-recourse; that is, borrower cannot owe more than the value of the home Title remains with the borrower 1

7 Importance of FHA program The FHA Home Equity Conversion Mortgage (HECM) insurance program has played a critical role in building the financial i infrastructure t for reverse mortgages by creating: an insurance model for the risks involved in loans that do not become due until the homeowner dies, sells the home, or moves permanently; flexible payment options to meet a variety of needs; a total annual loan cost (TALC) disclosure that is more complete than the annual percentage rate (APR) disclosure; mandatory counseling that educates consumers about reverse mortgages and alternative ways to address their needs; and the backing of the federal government, which resulted in funding of these loans first from Fannie Mae and more recently from Ginnie Mae securities. How have Reverse Mortgages been Funded? Over 90% of reverse mortgages have been HECM loans, and Fannie Mae was the sole purchaser of such loans (thereby providing the funding) until about 3 years ago. As a consequence, Fannie Mae set the terms of the vast majority of reverse mortgages: Virtually all HECMs were monthly adjustable rate loans. While one could elect various payment options, they were all variants of an open-ended line of credit. The interest rate was set at 1.5% (150 basis points) above the 10-year Treasury note rate. High upfront fees origination and mortgage insurance premiums. Fannie Mae held all of the loans in their portfolio, so there was no true secondary market for these loans. In short, there was little price or product competition. 2

8 How has the Funding Changed? In the wake of the collapse of Fannie Mae, it has essentially stopped purchasing reverse mortgages. Now, over 70% of reverse mortgages are funded through Ginnie Mae securities, which has created a secondary market and changed the terms of the loans dramatically: Small proprietary market for jumbo loans has disappeared. Ginnie Mae loans are almost all fixed rate loans. Almost all are full draw loans; that is, borrowers must take out the full amount for which they are eligible. Interest rates may be pegged to the 10-year Treasury rate or the LIBOR index with the spreads above the index variable. The upfront fees have been rolled into the interest rates on many fixed rate/full draw loans i.e., no origination fee, no servicing fee, and no mortgage insurance premium (but higher interest rates). How have Reverse Mortgage Loan Products Changed? Historically, since Fannie Mae purchased all HECMs, they were all variants of monthly adjustable rate lines of credit. The only alternative were proprietary p loans designed for owners of very high valued homes who wanted to maximize the amounts they wanted to borrow. These loans disappeared in the recent mortgage market meltdown. We now have two new product types: As described above, most loans are now fixed rate, full draw loans with characteristics more in common with forward mortgages. In addition, FHA has announced a new HECM Saver loan effective October 4 that will largely eliminate the upfront mortgage insurance premium in exchange for lower loan limits. Some signs that proprietary jumbo loans may be returning to the market. 3

9 How have HECM Borrowers Changed? The average borrower is younger now than was true earlier in the program: As recently as 2000, the average age of borrowers was 76.0 years; it was 72.9 years in FY Related to the younger age, the percentage of multiple borrowers (i.e., mostly married) increased from 30.2% in 2000 to 37.0%. The percentage who were single females decreased from 56.8% to 41.2%. The loan duration has been only 6-7 years on average among younger borrowers according to HUD data. Industry data indicate that younger borrowers are also most likely to take out fixed rate, full draw loans. Concern Many people are now entering retirement years in debt and are using RMs to retire those debts. Long-term consequences???? How have FHA Actions Changed Reverse Mortgages? FHA has made several recent changes to the HECM program in addition to offering the new HECM Saver program. Ongoing mortgage insurance premiums will increase by 150% on October 4 from 0.5% interest add on to 1.25%. Loan limits have been decreased by 10% last year and by an additional 1-5% on standard HECM loans. HUD will issue guidance in a few weeks on how to handle loans in default for failure to pay insurance and taxes. They are also considering further steps to prevent defaults. In short, HECMs have become more expensive and the loan limits lower than in than in the past. Moreover, the risk of foreclosure will be greater going forward than they have been in the past. 4

10 A More Complicated World for Consumers For consumers, the world of reverse mortgages has become more complex and the decisions more difficult: More loan types may be suited to different types of borrowers but knowing which is the best fit can be complicated. Not only are fees generally higher, but the ways in which they are charged can create complicated decisions e.g., upfront fees versus higher interest rates. Foreclosure risks will undoubtedly increase in the future. As always, borrowers should be very wary of anyone trying to sell anything to be paid for with a reverse mortgage such as annuities, long-term care insurance, or investments. What Are Lender Responsibilities? Both Congress and state legislatures have grappled with the issue of lender responsibility toward borrowers in light of industry practices that were a contributing cause to the mortgage market meltdown. These issues will be very important over the next few years. Recently passed financial reform legislation includes new responsibilities for lenders, as well as a study of industry practices related to reverse mortgages. Several states have considered legislation creating a fiduciary responsibility from lenders to act on behalf of the interests of borrowers. Others are looking at suitability standards for reverse mortgages. 5

11 Questions Don Redfoot

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