Even before an independent audit of the Federal Housing Administration’s financial position revealed the agency did not have enough net worth to pay off the balance of its outstanding insurance claims, its leaders said change was on the way for its Home Equity Conversion Mortgage program.
To address the near 70% proportion of full-draw fixed rate reverse mortgage borrowers in today’s market and the related issue of borrowers going into default due to failure to pay tax and insurance on their properties, HUD officials told the industry in October that change was on the horizon.
Now, with FHA’s reverse mortgage portfolio accounting for $2.8 billion in negative net worth based on assumptions surround the current lending environment, the agency is facing scrutiny of Congress and has asked for more authority to manage the reverse mortgage program in particular.
That change is coming and will be here soon, says former FHA commissioner and current Mortgage Bankers Association President David Stevens.
“If you read the actuarial report, there’s no scenario in which that program is self sustaining,” Stevens told RMD in an interview.
The HECM portion of the Mutual Mortgage Insurance fund was shown to be $2.8 billion short of paying off all outstanding insurance obligations, should they all come at once. Congress mandates the fund to maintain a capital ratio of 2%.
The prominence of the fixed rate product with very little viable market for the adjustable rate HECM, combined with market factors including the low interest rate environment and lagging home price recovery has led to a significant impact on the part of the reverse mortgage program in particular, Stevens says.
“That leaves HUD with the proverbial challenge of being stuck between a rock and a hard place,” he says. “They recognize the important role reverse mortgages play for seniors. They are virtually the sole provider of the program for those who have to use it. At the same time, they operate a business that by law under statute has to maintain a positive capital reserve in the fund. This means the HECM program has to be sustainable from a fiscal and fiduciary standpoint.”
While fixes to the forward insurance fund are implemented relatively easily, bringing the reverse mortgage insurance fund into the black takes more time and calculation, and in this case, could require the help of Congress.
Potential changes that have been discussed include restricting the uses of the fixed rate reverse mortgage product, reducing principal limit factors to make less available in terms of borrower proceeds, or to the extreme, eliminating the fixed rate product in favor of the HECM Saver, Stevens says.
A major concern lies in how “far” FHA must go to ensure the program is sustainable without ruling out too many borrowers or further damaging the fund by reducing volume.
“There is no question that if these initiatives are enacted, HUD will retain greater authority to protect the MMI Fund,” wrote K&L Gates attorney Phillip Schulman following the FHA’s audit, noting HECM program changes as one of the initiatives. “Clearly, a worthwhile goal. But at what cost?”
Industry advocates are working closely with HUD and FHA toward swift and sensible changes, in preparation for a Congressional hearing in early December during which the FHA audit is expected to be a topic of discussion.
“We are consulting with HUD to give them a chance to determine what their preferences are and we are going to be supportive of any effort they might make,” says Peter Bell, National Reverse Mortgage Lenders Association president and CEO.
The industry has been in close communication with HUD leadership, which has been vocal about program changes for several months, and most recently through a presentation by Deputy Assistant Secretary Charles Coulter during NRMLA’s annual convention in October.
“The team in place there are very much hands on and are involved in HECM in a way the top officials have not been in recent years,” Bell says. “They are really giving it the time and attention to think it through.”
This attention is even more necessary given the sweeping changes that could be seen barring authority granted by Congress for FHA to make more calculated alterations to the program. That change, in whatever form, becomes a necessity for a sustainable program.
“The only way you can unfortunately protect the overall reverse mortgage program during low home value appreciation and low interest rates is to intervene and take steps that some may think are more drastic than business and the consumer require,” Stevens says. “But they may be the only option.”
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