When the Department of Housing and Urban Development unveiled its 2010 budget request last month, it included a request for $798 million credit subsidy for the FHA’s reverse mortgage program.  It’s the first time HUD has requested a subsidy for the program and left many questioning if the HECM needs to change in order ensure the viability of the product.

Looking for more information about the request from HUD, I came across the Congressional Justification Report for its FY 2010 budget which provides some insight into the reasoning behind the request. 

According to the report, HUD estimates that over 121,000 loans will be endorsed under FHA”s home equity conversion mortgage in FY 2010.  For FY 2009, HUD estimates that the industry will endorse slightly under 120,000 HECMs.  

$789 million Reverse Mortgage Subsidy

Included in the 2010 Budget request is an estimated $798 million current appropriation of credit subsidy for the HECM program plus an indefinite appropriation in the event HECM demand exceeds that projected.

While the HECM program in the current year was estimated to bear a subsidy rate of -1.37 percent, yielding offsetting budgetary receipts; the rate for fiscal year 2010 switches to +2.66 percent, largely due to changes in economic assumptions, and therefore will require a new discretionary appropriation of $798 million to permit the guarantee of the estimated $30 billion in loan volume.

It states that HECM reverse mortgage guarantee program credit subsidy rate is especially sensitive to the assumptions for future house price appreciation due to the loans’ extended average tenure along with the rising outstanding balances that accrue during the life of the loans.

The HECM subsidy rate reflects a major change from prior years because the economic estimates for the fiscal year 2010 Budget assume significantly lower house price growth in future years.

In addition, FHA made numerous improvements in the HECM credit subsidy cash flow model during the past year that provide greater sensitivity to program and economic variables.

HECM Counseling

One of the most interesting aspects of the report was in regards to HECM counseling which states that approximately $15 million of the $89.5 million being requested for counseling in general will be used to support reverse mortgage counseling. 

Since HECM counseling is required by statute for borrowers, HUD states that the $15 million for reverse mortgage counseling is necessary in order to ensure that a sufficient supply of reverse mortgage counseling is available to meet that requirement.

It adds that during fiscal year 2007, many agencies stopped providing reverse mortgage counseling mid-year because they ran out of funding. The result was that
elderly individuals could not close on their HECM mortgages, denying them additional income to meet housing, medical, and other expenses.

While HECM counseling services are mandated by law, HUD admits that funding for reverse mortgage counseling has always been inadequate.  Based on current trends the total cost of HECM counseling nationwide could exceed $30 million in fiscal year 2011. The budget requests only a portion of that projected total, with the anticipated balance to be paid with fees charged to consumers.

The budget also continues to support training for housing counselors working for HUD-approved Housing Counseling Agencies in order to standardize and continue improving the quality of housing counseling provided.  Approximately $8 million of the proposed budget will support this competitive training initiative, making quality training accessible and affordable to the 7,100 counselors from the approximately 2,600 HUD-approved agencies

Congressional Justifications for 2010 Estimates