Mr. Torres and Mr. Veale,

Mr. Torres, I think you will find that Mr. Veale agrees with your premise about the long-term nature of the HECM program. He has written several times about it.

You seem to over emphasize the theories upon which the HECM model is developed. Unless I am mistaken that was a great reason for being categorized under the GI category in the HUD budget but now that HERA has forced the program under the MMI category, each new cohort of HECMs must be justified each and every year. It seems no one in Congress is listening to you or Mr. Veale on the long-term nature of the program.

You need to keep beating the drum of the long-term justification for the break even nature of the HECM program but also help us find a way to combat the Administration's use of incorrect home appreciation rates so that Congress will not continue cutting down the principal limit factors. You no doubt can contribute to this effort.

Mr. Veale, it seems a waste of your time to engage in this type of argument. Your time is much better spent in writing articles on the wider issues impacting our industry.

The Critic,

I appreciate your concern. I will terminate any future exchanges with Mr. Torres.

Thank you Critic for the good points.

I totally agree with you regarding the push to stop and reverse the tide of negative and pessimistic views by some in our goverment about the health of the HECM program. I am willing to help and contribute, but unfortunately I am not an "insighter" or previewed to the data before it is released. For some reason, I think that there seems to be the need for training the decision makers and their aids on some of the basic technical fundamentals of the program. One culprit could be the lack of public distribution of the reports on which the PL algorithm is based.If more of these folks understood the details then perhaps we could prevent further cuts.
I am willing to contribute.

Mr. Veale,

You love to make claims without backing them up, except for just commenting on the information you are given.

I guess I will have to correct you again, as is customary by now.
"The audited management report with a limited distribution exception is much different"

First of all, the stress test results I am referring to are presented in an actuarial analysis and is not an audited report. Furthermore is not limited distribution
for you and anyone who cares to READ them here is the link:
http://portal.hud.gov/portal/page/portal/HUD/fe...

The report was prepared by by IBM global services for FHA. While, it is true that the stress analysis was based on the projected endorements for the HECM MMI fund (ie 2009 ), even that report makes mention of the possible impact (not accounted for) of the 10% pricipal limit reduction. As I quote from the report itself:
"The principal limit factor
reduction decreases the ratio of the amount of initial equity available to the MCA at origination, and is
expected to reduce HUD’s insurance risk. As a result, with all other modeling assumptions held constant,
the actual economic value of the FY 2010 book-of-business is expected to be greater than the estimate
presented in this review."
So when I mentioned the possible impact of the 10% PL reduction and its justfication, I was referring to this statement. It not just the small number terminations that will happen in 2010 from the loans endorsed in FY 09, but the impact on the demand of the product because of the reduction in PL. The reduced demand will help in a risk sense, but was the 10% PL reduction really needed it? I still have not seen a study which quantifies the magnitude of the risk reduction to the program by the 10% PL hair cut.When the numbers for 2010 come out, are they going to be as pesimistic as we were originally hinted if the 10% had not be implemented? How about the next 10 years???
As for the question you asked and I purposely did not answer to see if you could provide some insight ie:
"What significance does the MCA versus the outstanding balances actually have as to potential losses?"

Well obviously there are a few things that you fail to acknowledge:
I quote "The insurance-in-force (IIF) is expressed as the total maximum claim amounts (MCA) of the active
portfolio. The MCA of all active insured loans represents HUD’s maximum risk exposure to the
portfolio."
Now the HECM program has one particular type of outflow and that is the Type 2 Claim on assigment. Even though the loan is not due and payable at the time of an assigment, the fund must still pay a claim for the MCA (which is signficantly larger than in claim 1 type).Moreover during this time there are may be additional payments to the borrowers and the balance will continue to grow. Look at appendix C of the report to see how this outflows are accounted for. So the answer to your question is: The closer the outstanding balance is to MCA then, then the probability of assigment increases, potentially increasing the likelyhood of an outflow which if you are clever to notice in the budget report they show this assigments on the defaulted guaranteed loans (note the caption on these pages about HECMs), pages 53 and 54 of the FHA annual management report. Sooo... if the assigments increase then you would see the effect on the managment reports and it wont be a positve effect.Remember outflows of program affect the yearly operation of the program (dont just say that HUD may recover the full value of those claims later on, by law it must be accounted for at the time of claim payment) Another thing you could say is that the original assumptions about longevity risk in the HECM model have been validated (ie not a significant larger number of borrowers than predicted have outlived the estimated age span) Alternatively of course we can say that the majority of endorsed cases have a relative young life.
Which brings up a something about the case you cite, again you are looking at short term views incorrectly, but the fact is that the majority of the current active loans will not become due and payable in the next 2 yeears (when only 21% of all cases since inception of the program almost 20 years ago have terminated) and if you look at the assumptions made in several sources including the actuarial report you can see in appedix D of the report that you would have the following house price appreciation assumptions in the baseline model: -6.9% for fy10, -1.1% for fy11 and 1.4% for fy12 and increasing to above 3% per year there after. The scenario you cite may happen this year and next, but should be tapering off by 2011 or 2012. So once more, please read the reports published before using this type of reasoning. Unless we have a second home price market debacle that extends for the next 5-10 yrs there doesnt seem to be a huge systemic problem for the program in this respect.

By the way I do read your comments and simply I dont agree with them some times. You are indeed very harsh when you dont understand an argument and you could disagree with the poster without using that kind of language. HEre is the question I posted before to you: Have you read the HECM algorithm procedure?? I have posted the references before and no, it is not available on the web as simple free link. So far the answer seem to be no.

Mr. Torres,

Your first and second comments discuss information from the report contained in the article immediately above. It is the only report to which you refer until you come to your third comment. Your third comment jumps to an actuarial study by IBM highlighted in an earlier RMD article.

The report in the article immediately above is the annual report of the management of HUD. HUD auditors’ opinion begins on Page 93 of the annual report (or page 98 of 129 of the .pdf file) and on page 98 of the annual report (page 103 of the 129 pages of the .pdf file) the auditors state under a section titled "Distribution": “This report is intended solely for the information and use of the HUD OIG, the Management of HUD and FHA, OMB, GAO, and the Congress of the United States, and is not intended to be and should not be used by anyone other than these specified parties.” It is signed by the CPA firm of Urbach, Kahn, & Werlin, LLP on November 9, 2009 in Arlington, Virginia. In CPA parlance that is known as a limited distribution list exception.

You can find the report referred to in your first two comments and in the current article above at http://www.hud.gov/offices/hsg/fhafy09annualman.... The article you refer to in your third comment is not the work of a CPA firm and no one is told not to use it.

Again you stated in your second comment: “Again rather than making statements that are so short sighted, lets wait until the 2010 reports come out and lets see if we end up with a very small subsidy rate (assuming negative after the 10% hair cut).” So what reports were you referring to in your second comment?

I prefer believing your comments are not mere ramblings. Some of your insights have been quite useful. Can you stick with the annual report in the article above? I understand simple statistical theory; I was a math major emphasizing statistical theory in upper division. It is great in justifying projections but worthless in justifying projections when historical data is readily available. It certainly does not prove the validity of a projection; only historical data can do that.

If you have any question about my CPA, you can go to the California Board of Accountancy website, click on to the license lookup, and verify it there. You can also go to the CSA website and verify me as a CSA and the California Department of Real Estate and verify that I am a licensed real estate broker. As to you, how do I verify who you are or what credentials you hold?

Mr. Veale,

I agree with Critic that we best put our efforts together rather than engage in sort of negative attacks back and forth.
Just for clarification: I thought that you were referring to the Actuarial report as the audited, short distribution report. That is the way it came accross in your post.As far as to why I keep looking at the algorithm versus the actual data (ie what you call historical data), my view point is that the algorithm is used as a prediction tool, while the data (or historical data as you call it) is the validation of that prediction tool. Keep in mind that my brackgound is in engineering, developing theoretical tools and validating them against experimental data. That was a long time ago. Point is: if the data doesnt validate the algorithm then some changes or tweaks may be required. It seems like the administration and others are beating the drum that the program is in bad shape when they fail to validate the tool with the data coming in.

As for credentials:
I hold an BS in aerospace engineering, worked for National Aerospace and Aeronautics Agency (NASA) for 10 yrs developing advanced hypersonic aerodynamics and propulsion models.You may find a NASA tr report out there but most of my bibliography is not in the open.
I hold a MS in Computer Science and worked 3 years for Telcordia (Formerly Bellcore Labs) as a consultant to several large Domestic and International Telecom Carriers
I worked as Consultant to NASA (SAIC) working on developing risk models for the lunar and mars mission (including ARES) before the concept became a reality. This is where I learned a lot about risk analysis.
I works for one of the 3 top Reverse Mortgage Lenders on their retail side. This is where I learned the RM bussiness for 3 yrs.
I have worked for an OCC regulated institution for the last 2 1/2 years as RM Sales Manager.
I have registered with the NMLS system but right now the system doesnt allow the public view just yet.

So as you can see I am not just a RM originator but also a "rocket scientist" who does RM loans. So I guess that is why I look at this program with a slight different point of view than others.

I think you have impressive credentials as a CPA and RE broker.I never questioned those at all.

Cheers

Mr. Torres,

I appreciate those who stand up for what they believe. I do not appreciate those who try to be less than truthful in hiding what they did write.

I cannot understand how when the thread is on the management report discussed in the article and I quote you, you assume I am focusing on an IBM prepared actuarial report that was not mentioned in my comment or in the comments (including yours) or the article that immediately precede my first quote of what you wrote. While people make such mistakes, somehow your claim fits a different pattern.

In the last comment addressed to me you write: “I think you have impressive credentials as a CPA and RE broker.I never questioned those at all.” Here is what you said in your second comment above: “Your argument lacks theoretical rigour and frankly if you are an accountant please stick to accounting theory.” In fact you did question if I was an accountant at all so I responded that I am a CPA giving you the government entity where you can verify that I am what I claim and more.

You then go into great lengths at giving all but unverifiable education information and job experience about yourself. You provide exhaustive information in an attempt to impress when that was not asked of you at all. Worse, you intend to insult and then when exposed, childishly deny your insult.

My esteem for what you write is in decline. You deflect and then try to take the high road. You may not be bothered by my rebuke but while not disappointed with your intellect, I am disappointed with your intellectual integrity. Even though in the past I found your discourse valuable, I must decline any further exchanges on this website.

Mr. Torres,

What significance does the MCA versus the outstanding balances actually have as to potential losses? Your conclusion is extremely misleading.

The MCA reflects the total of all MCAs as they existed at the time of the related closings. The only true measure of the condition of the HECM fund are the sum of the differences between the current value of each home and the current balance due for each related HECM compared to the total current value of assets available to pay off any net loss.

For example, in 2006 an actual HECM was made that today has a $220,000 balance due and a MCA of $300,000. The only trouble is the market value of that home is less than $130,000 today with a projection of an additional 20% reduction in value over the next calendar year. FHA has collected a little less than $10,000 of MIP on the HECM for which it has a potential liability of $100,000 today and over $130,000 by the end of next year. Here the balance due is just a little over 70% of the MCA yet the program is at risk for about $90,000. What exactly does the percentage of balance due to MCA indicate in this case?

Such is the problem with using old data. Unlike you I take no comfort in the data in which you so easily find it. The total balances due versus the MCAs provides no insight whatsoever into the current health of the program.

While I agree with your view on the poor decision by the Administration in using inflation rates plus on-half percent, your grounds for reaching those conclusions are based on very weak standards. It is the reasonableness of the appreciation rates used that must be questioned not some specious argument based on irrelevant and dated information.

Mr. Veale,

It has become obvious that when it comes to risk management analysis and statistical/stochastic theory you lack understanding.
The analysis presented in the report is for fiscal year 2009 and 2008 and not just old data. The fact of the matter is that after all the numbers are in, there is an actual negative subsidy rate for 2009. Again, you keep falling in the trap of looking at a single event in a short span of time and generalizing to a long term stochastical problem. The arguments that you present would be a problem if and only iff that situation would exist and persist for say a much longer time frame than just a year or two. Your argument lacks theoretical rigour and frankly if you are an accountant please stick to accounting theory. As I recommended before, go and read the papers by the HECMs authors so that you can understand how the program is supposed to work. I always endup answering your questions because of your lack of understanding of the subject. Looking at long term trends such such as housing appreciation on short term basis is not accurate. Take the the housing values over the last 30 yrs in some markets and calculate what the appreciation rate is supposed to be. What you are seeing in the last two years is just a small part of the cycle. Just like you didnt complain about the appreciation rates of 30-50% year to year during 04-07, you shouldnt complaint for depreciation rates of 20-30% during the last 2 years. IT IS THE LONG TERM rate that counts.If that same example that you cite, happens say 4-5 yrs from now, and the housing values go back to some value significantly higher than today, would you still use it?. Also the new loans that are endorsed now already account for the bottoming of the market, so when those loans become due and we have a better housing value trend, would you be complaining about the assumptions? You cant have it both ways.
Again rather than making statements that are so short sighted, lets wait until the 2010 reports come out and lets see if we end up with a very small subsidy rate (assuming negative after the 10% hair cut). I would recommend you study the stress tests that FHA did on the HECM program and see what the capitalization ratios are for those.

Mr. Torres,

I really do not have the time to fool around with your wild claims. To conserve time I will analyze to a limited degree just one argument you present in your last comment

You state: “Again rather than making statements that are so short sighted, lets wait until the 2010 reports come out and lets see if we end up with a very small subsidy rate (assuming negative after the 10% hair cut).”

This is your conclusion. It clearly shows you do not understand the difference between the information contained in the budget and the information contained in the financial statements. The so called 10% hair cut (your term, not mine) is based on the budget report.

The budget projects on a discounted cash flow basis what the total MIP income net of estimated losses from terminations will be from all HECMs estimated to be endorsed in the fiscal year ending September 30, 2010. It looks at this cohort of HECMs and only this cohort of HECMs. No other MIP or termination losses from HECMs endorsed from any other fiscal year are reflected in this estimate.

The audited management report with a limited distribution exception is much different. It looks at MIP income due from all HECMs (no matter what the year of endorsement) for that particular fiscal year and only that fiscal year and the estimated losses from terminations within that particular fiscal year and only that fiscal year no matter when the related HECM was endorsed. It is based solely on historical information.

Mr. Torres, the two reports simply do not relate. Now I know why you are so adamant about things you really do not understand. It is now plainly evident.

The information to determine if the budget estimates are reasonable will not be available for at least the fiscal year ending September 30, 2020, if then. To be relevant, the vast majority of HECMs endorsed during the fiscal year ending September 30, 2010 will have to be terminated so that we are looking at historical data with limited projections. How many HECMs in the cohort endorsed during the fiscal year ending September 30, 2010 do you really anticipate will be terminated by September 30, 2010 or how much of the total MIP to be generated by these HECMs will have been generated by that date?

I truly do not believe you have read what I write. It is and has been my estimate that if no new HECMs were ever endorsed, the program as a whole will have proved to have produced a slight net loss to the federal government. My position on the current outstanding HECMs is much, much different. With the number of times I have addressed this subject on this website, I thought you would know my position by now.

As I indicated in previous posts, the architects of the HECM program designed the program to be BREAK EVEN over the LONG TERM!!!
As the information on page 56 of the reports shows: 452,196 loans out of 571,709 HECM loans are still active (from the program's inception) with a total outstanding balance of about $60 billion, with a corresponding max claim amount of about $103 billion. This means that since the beginning there still about 79% of loans that are active so about 21% have terminated and the balance to max claim amount ratio of active loans is about 58%. Not bad at all!!!
More interesting is to note that the subsidy expense table on page 60 where for 09 we see a negative HECM subsidy rate of 1.37% and for 08 we see a negative rate of 1.90.

The glaring question is: after looking at these numbers how could such a pessimistic analysis was made by the OMB which triggered the 10% reduction to the principal limits??
Just looking at the long term view and volume is it possible to end up a positive rate of subsidy for 2010?? I mean the change in subsidy rate for 08-09 was .67%. Even if you assume twice the subsidy rate dropped you would end up at -1.37% (09) + 1.34% (change) = -.03% for 2010. These are all assumed with the old PL factors!!!
It is becomming obvious that the folks calculating the forecasts either are not well versed in the science of probability and stochastic analyis or there is some other political motive behind the scenes.

I would love to see the numbers for 2010 next year with both the 10% hair cut and WHAT IT WOULD HAVE BEEN without the 10% hair cut. I am sure we wont see the latter for obvious reasons.

Only the government could make a report where $1,457,000 in income (fees) is shown in brackets as if it were a loss.

Mr. Inca

In the accounting world, credits are normally shown in brackets. While it is unusual for external reports to be presented in this fashion, it is not without precedence.

I would love to hear from the "informed" what is the significance of this release. Has the fund been adequately funded, or inadequately funded - the latter being my impression which was causing so much discussion as to whether premiums need to be increased, or guarantees decreased. Sorry for a repeated message. I was under the impression that the first did not go thru.

I am not quite sure what the significance of this article is, but w/ a 72% default payout, and therefore a 28% retention of premium, the fund is not in as bad a shape as I previously believed. I would love to hear from the more informed.