All originators experienced it. No one seemed to like it. Several in the industry tried to warn us it was coming. No one knew when it arrived what would happen. When it arrived, the majority of those who spoke out blamed HUD; however, the real culprit was and still remains — Congress and perhaps even far worse, the White House.

Whatever it was reduced principal limits of 10% (in some cases slightly more) started on October 1, 2009. So what was it? It was our initial encounter with the ramifications of Section 2118(b)(2) of HERA (the Housing and Economic Recovery Act of 2008, P.L. 110-289) and apparently how the present White House interpreted its function in the HECM budget process, along with the failure of Congress to fund the indicated subsidy before October 1, 2009. This section reclassified the HECM program from the General Insurance Fund to the Mutual Mortgage Insurance Fund.

Get ready. We will be dealing with the ramifications from the recategorization each and every fiscal year hereafter. This is just the start. We may see yet another adjustment later this fiscal year.

“But here the villain lies.”

HERA Section 2118(b)(2) reads so deceptively simple: “HOME EQUITY CONVERSION MORTGAGES.—Section 255(i)(2)(A) of the National Housing Act (12 U.S.C. 1715z–20(i)(2)(A)) is amended by striking ‘General Insurance Fund’ and inserting ‘Mutual Mortgage Insurance Fund’.” It is buried towards the end of hundreds of pages of legislation. But here the villain lies.

The idea seems right. The HUD Secretary must report to Congress the expected over all results from the HECMs which are projected to be endorsed in a fiscal year. If the projection indicates the need for a subsidy, Congress must either approve the entire subsidy or the program must be modified to absorb the difference between any projected loss and the amount of any subsidy Congress grants.

As the FHA Modernization Bill (the exclusive FHA portion of HERA) was coming together, some in the industry described the bill as nothing more negative than reductions to the maximum origination fee structure, prohibitions on cross-selling, and some changes to counseling. At the time there was little fear of not receiving full subsidies when and as needed.

HERA was an incorporation of several bills that were created in much headier times. Proprietary reverse mortgages were waxing and several industry leaders were openly predicting that by the end of 2010, HECMs could make up as little as 25% of new originations. No one focused on how negative this little subsection of HERA [Section 2118(b)(2)] or Section 1109 (limitations on the mortgage portfolio of Fannie Mae) might be to the industry. Emphasizing or even seriously discussing HECMs seemed so passé. But during the second quarter of 2008 many were starting to be rudely awakened to the demise of the proprietary reverse mortgage market. In less than eighteen months, when discussing even state legislation, many have forgotten about proprietary reverse mortgages altogether.

So Far Congress Has Failed to Subsidize or Act Timely

This year, the U.S. House of Representatives chose to do nothing to subsidize the HECM program while the U.S. Senate showed its preference to provide some help. When it came to ironing out their HECM differences and those related to other areas in the appropriations bill for the Departments of Transportation and HUD along with some related agencies, Congress chose to debate national health care instead. Of course we should not feel slighted; Congress did the same on almost all of the other eleven appropriations bills that it takes to pass the budget.

A new President did his job and got his budget to Congress in great time. Upon arrival, the majority in Congress applauded it. In fact for the first time in years, Congress and the White House are controlled by one political party, the same political party that put the final touches on HERA. What could go wrong? But when it came time to getting the twelve appropriations bills enacted, it seemed that one political party was in charge of the White House and a new third party in charge of Congress.

What Role Did the Obama Administration Play in the Reduction?

Was the credit subsidy the direct result of the White House imposing its will on HUD? You can read about it on Page 30 of the July 2009 GAO Report on Reverse Mortgages which states:

“HUD officials told us that the positive subsidy rate for fiscal year 2010 largely was due to incorporating more conservative assumptions about long-term house price trends than had been used for prior cohorts. For budgeting purposes, the Administration decided to use more modest appreciation rates than the private sector forecasts HUD typically uses. Specifically, the house price appreciation rates used were 0.5 percent greater than the forecasted inflation rates. HUD officials told us that if they had used IHS Global Insight projections to develop the fiscal year 2010 credit subsidy estimate, there would be no need for an appropriation because the credit subsidy rate would be negative.”

On its webpage, GAO describes itself as: “The U.S. Government Accountability Office (GAO) is known as ‘the investigative arm of Congress’ and ‘the congressional watchdog.’ GAO supports the Congress….” Is what GAO reported a window into things to come?

More Changes to the Principal Limit Factors Later This Fiscal Year?

Last year it was almost understandable that Congress could not get the budget in place. The party of the White House proposed it and the party of the majority in Congress vehemently opposed it. The government was divided and HUD operated on what is called a “Continuing Resolution.” Despite the same party in charge of both branches of government, Congress appears just as ineffective as it was last year. Some prognosticators are even talking about some appropriations bills not becoming law during this entire fiscal year.

Some believe the appropriations bill for HUD can be enacted before November. This then will be our second brush with the impact of HERA Section 2118(b)(2). None of us know what this will mean. Will Congress fully or partially subsidize the HECM program? Will it allow HUD to adjust any shortfall through a combination of the Principal Limit Factors (PLF) and the MIP or just the PLFs? If the PLFs can be increased, how long will it take to see those increases and to which loans will the increase apply? Will Congress simply pass the House version with no extension of the $625,500 lending limit (at least for now)? It is doubtful if those who decry the speed with which HUD forced PLF reductions on the industry will so readily complain about swift increases to PLFs.

The Blame Game

So why not blame HUD for only giving us a few days notice? HUD could not do anything until it knew what the Senate bill would pass. The Senate kept HUD waiting, saying it would get its version of the appropriations bill (H.R. 3288 as amended by the Senate) done right after the August Congressional recess. Finally on September 17, 2009, the Senate passed its bill. HUD acted as quickly as possible within those limitations. Now to find out what the percentage ultimately will be, we must wait again for Congress to do something in Committee and then through final votes.

HUD has been telling everyone for months about the problem it was facing. Several leaders and NRMLA were also discussing it during that time. For at least two months some who write for senior publications discussed this in advertorials. Yes, we did not have the details but we should have known something would happen by October 1, 2009, unless Congress fully subsidized the $798 million shortfall. HUD tried to avoid the credit subsidy but once defeated in this attempt could not predict what Congress might do. Once the Senate bill was passed, HUD moved quickly to notify us all about the required course of action. Who to blame?

Don’t blame HUD.

James E. Veale, CPA, MBT
SVP of Tax and Government Affairs & Director of Originator Recruiting for Security One Lending