Page 374 - 2019 6th AFIS & ASMMA

From the supply side, the lender wants the first thing: this is what we
The same situation actually faces the reverse mortgage, the HECM
program. Since the start, the HECM has always been designed as an
insurance program. The government provided insurance to reach the
borrower and the lender on the market to form the reverse mortgage
market. So their mission is defined; they want to facilitate the liquidity
on the market, so that the borrower, if they need, they have a channel to
convert their equity in the house to become regular income. And from
here we are dealing with two sides: demand and supply.
On the demand side, the borrowers want to secure the housing for life,
they don't want sell because it's part of the equity and eventually someday
they will be forced out of the housing. That's one demand. The second
one is once they decided to go with the reverse mortgage, it means that
they actually don't care much about how to handle the remaining value
of the HECM, if there is any, because they would be dead by then. So
capital gain or appreciation is not their interest. And their objective is try
just to see, given today's house I have, how much additional income can
I get from the lender? If one particular lender can give me the maximum
value, I will go with that lender. So that's their objective.
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learned when developing reverse mortgage in other countries; when we
talk to the lender, the first thing they push back is they cannot underwrite
anything without a definite termination date. And HECM, we talked
about the termination day is not defined and its contingent on when this
borrower dies or moves out of the housing. So that is something lenders
has been strongly resistant to. The second thing is when they are going
to lend money, they want a fair compensation to the risk that they are
taking. The risk involves how long this loan will last into the future and
how much we can recover from this loan at the maturity day. So at the
beginning, the US government found that this gap between these two
groups and their expectations cannot be aligned. So there is a failure
on the private market to resolve it by itself. That's why the government
stepped in and provided several features to make this market work.
The first one is the it has to go through the FHA to ensure the full Session III
payment repayment of the unpaid balance, upon the determination of
the loan or upon the death of the loan. So that took care a lot of the risk
of the return involved. And the second one; they allow an option to the
lender. Whenever the unpaid balance of the loan has reached the initial
house value or 98 percent of the initial house price at that point in time,
the lender can sell the mortgage to FHA at the fair unpaid balance. So
in that case, it's indirectly established a definite termination date. At the
beginning we can estimate how long it would take to reach that point,
and that becomes a semi-maturity day for the lender. And those two
make the whole market possible. The third, as Min Hwang just talked
about, they also provided additional liquidity to the lender; the lender
can securitize the HECM into the HMBS through Ginnie Mae, which
provides further protection against the maturity risk.
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