New Analysis: Did FHA’s Reverse Mortgage Audit Go Too Far?

The independent audit of the Federal Housing Administration’s financial health found a negative net worth of more than $16 billion, but some say the report might have been overly negative in its projections.

The agency’s Home Equity Conversion Mortgage program contributed to negative $2.8 billion of the problem, and the report suggests it will take a few years until it turns positive. Using different assumptions, however, analysis shows the HECM program could already be contributing positively.

The audit’s findings will direct change across FHA’s housing programs including its reverse mortgage program, the agency wrote in a report to Congress upon the audit’s release. But analysts say the audit may have gone too far it its projections, and thus, program changes currently under discussion may be too strong in response.

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“We can’t know for certain without looking at their model but the two main points we want to make are one, that the product as currently structured is not contributing to the problem,” says Joe Kelly, partner with financial services firm New View Advisors, which recently published detailed analysis on the report and its conclusions. “The other point we want to make is that HECM has already cut back its loan to value ratio based on principal limits. But the forward product hasn’t. We do not believe the HECM program is contributing disproportionately  to FHA’s projected deficits/losses.”

In the analysis published on New View’s website, Kelly and his colleagues respond to the audit’s findings, noting that while appropriately conservative in some of its estimates, the review may go too far in some of its conclusions.

Based on very rough calculations without actually recreating the audit’s modeling, Kelly estimates the HECM portion of the MMI fund may be more realistically valued at positive $.6 billion rather than the negative $2.8 billion the report found, accounting for fewer future losses than assumed in the official review and New View’s estimate of ongoing insurance premiums collected for the HECM portfolio.

The analysis weighs strongly in a discussion of potential changes to the program, having led FHA to ask Congress for more authority in managing the Home Equity Conversion Mortgage program accordingly. If that authority is not granted, it will mean sweeping changes for the product, MBA President Dave Stevens stressed to RMD last week.

“We’re hoping there are not ‘root canal’ changes to the product that are not necessary,” Kelly says.

FHA leadership agrees the older vintages in its overall portfolio are the source of the problem and that recent changes are already protecting the current books of business.

“Since 2010, we significantly increased the revenue coming in to cover the projected losses,” FHA acting commissioner Carol Galante told attendees of a housing summit hosted by the Center for American Progress last week. “The credit quality of the credit losses is projected to go down significantly. So what you have is a positive economic value in new books of business and we are dealing with the hangover of prior years’ books of business.”

Yet the administration already has announced changes to its forward program and says it will have HECM changes in order pending additional authority granted from Congress to manage the reverse mortgage program. The question remains whether the basis for those changes was too far reaching.

“In some cases they were appropriately more conservative [in the audit],” Kelly says. “We’re not saying it’s all wrong. In some cases they made appropriate adjustments. We just have some questions about whether they go too far.”

View the New View Advisors analysis.

Written by Elizabeth Ecker