Obama Administration Requests $798 Million To Aid Reverse Mortgage Program

The Obama administration is asking taxpayers to subsidize the Federal Housing Administration’s program for reverse mortgages for the first time.  The administration has requested that Congress appropriate $798 million for the Home Equity Conversion Mortgage (HECM), according to budget documents released today.According to the budget documents:

The decline in house prices has adversely affected the projected credit performance of Home Equity Conversion Mortgages. As a result, the program has a positive subsidy rate. The Budget provides both fixed and variable appropriations of credit subsidy to support continuous operation of the program even if actual loan activity exceeds projections. The Budget projects insurance of $300 billion in single-family forward mortgages and $30 billion in Home Equity Conversion Mortgages with an additional $70 billion in commitment limitation available in case these amounts are exceeded during execution.

There has been lots of debate about how the HECM program is performing and it’s clear that HUD is paying attention.  NRMLA’s President Peter Bell provides RMD readers some more information here or just scroll down for his comment.White House Requests Taxpayer Subsidy For Reverse Mortgages


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  • Good morning,

    This move on the part of the O’bama administration is a long awaited needed one in order to keep the HECM alive. Why they are just now asking for this now, heaven only knows?

    We seem to always be in a panic mode. This move should have been made months ago. However, we will take it, we will take what ever we can get that makes sense.

    This still does not solve the FNMA issue of dropping the BOMB on the industry with the margin increases. We are all in a disaster mode trying to save the loans in process and those going into closing. The temporary confusion we are in could have been avoided.

    I am not saying this move was not needed. We need to attract investors other than FNMA. However, FNMA’s move was so sudden it has created a Black Cloud to loom over the industry. Many seniors across the country are hurting today because of it.

    Just raising margins to meet secondary market demands and needs is not the only solution to the problem. This move addresses only one of many problems seniors and the industry will face in the future. Especially when indexes start to rise again, and they will!

    The Reverse Mortgage industry’s survival is so important to the future of so many people through out our nation. I will go as far as saying the Reverse Mortgage industry’s survival is vital to the economy of our country. We Must, some how bring “Simplicity” back into this program. Studies and research is needed by those that understand the program. We can’t let margins and indexes run away from us and the markets like a Freight Train.

    I wish everyone a good weekend.

    John A. Smaldone

  • What does that mean- “The program has a positive subsidy rate”? Is there anything in there about reducing the FHA insurance fees?

    One other commment, we should all write to the FHA re: appraisal rules for rm’s. They should be different than for purchases. With the new “Declining market Mortgagee Letter”, appraisals are being lowered, and the fact that these customers would never sell their homes for today’s short sale/depressed market prices should be taken into account.

  • Bob,

    As far as I know, a positive subsidy rate means that the program was losing money. Not really shocking because of the decline in home values, when values come back a bit that should change.

    I’m not an expert on the subsidy rates so if anyone else has more information please share.

  • Mr. Smaldone,
    I agree with you wholeheartedly, but from our position as seniors it seems inconceivable that the FED, or any agency thereof, would actually care about us and our needs! As a seasoned RM rep and a senior with a HECM, my perspective may be different, but most of the reps with the lenders in my marketplace care about seniors and their needs. Very seldom do I hear about some predatory sales person taking advantage of a senior. Most reps really do care, and yet the Fed and State governments alike keep passing laws to control our treatment of seniors. Then without a clear understanding of the program, and only thinking they are in the know, they pass laws and hand down Federal edicts, almost performing the role of the legislature in enacting law, that in their eyes are designed to protect, but only hurt seniors. They do it again and again like some self-righteous holy cow. It gets sickening after awhile. It is easy to turn a jaundiced ear to their point of view because their actions are shouting so much louder than their pious deeds!

    Reed Swain

  • HECM’s, becuase of their popularity (and for some a necessity) have become a sub set of the “third rail” mentality of the Feds.

    Since they couldn’t stop the program directly, they’ve simply made it less attractive to the borrowers by reducing benefits and increasing costs.

    No one knows when, or if, investors will step up and what it will take to entice them to do so.

    Mission accomplished, no push back or having to come up with some tepid excuses as to why they cut the programs back.

    SSDD (same stuff, different day), or I’m from the government, I’m here to help you.

  • The request for an additional $798 million in credit subsidy for the HECM program is a technical matter that is the result of a combination of the current state of the housing market and the way the HECM program is accounted for.

    As many folks know, a significant factor in determining what MIP should be assessed and what principal limit amount should be made available is home price appreciation. If home price appreciation assumptions are adjusted downward, either MIPs must be raised or principal limit factors must be reduced — or more subsidy must be made available to the program.

    The HECM program has, for years, been predicated on an annual home price appreciation assumption upwards of 3%. Now, OMB, which is part of the White House and is responsible for developing the administration’s budget, in concert with the various federal departments, has determined that home price appreciation (HPA) assumptions for the next few years need to be adjusted downwards. (OMB does not disclose it’s assumptions to avoid adversely impacting markets.)

    Once the financial assumptions behind the HECM program change, adjustments become necessary. As the HPA assumptions are lowered, the projection for the performance of the HECM program changes.

    For years, the HECM program was perceived to be cash positive, meaning that it generated more money for the FHA, than it paid out in claims. In other words, income in any given year (from mortgage insurance premiums and collections) exceeded payouts to settle claims. The fact that the program contributed to the federal treasury, rather than operated at an annual cost to the treasury, means that the program operated with a “negative credit subsidy.” In other words, no subsidy from the taxpayers was required. That is good.

    However, the program is operated — for federal budgetary purposes — on a year-to-year basis, not a cumulative basis. So, despite the fact that the HECM program has provided a net contribution for many years til now, OMBs now believes that, based on its new assumptions and evaluation of HECM activity, in the next federal fiscal year, payouts for claims will exceed receipts from MIPs and collections from properties that have been taken back and sold.

    As a result, the program has moved from having a “negative credit subsidy,” which is good, to requiring a “positive credit subsidy,” which is bad. This means that the HECM program will cost the taxpayers money this year. OMB believes that amount of “positive credit subsidy” that is needed to be $798 million, and has included it in the administration’s proposed budget.

    This is the beginning of the budget debate. It shows that the administration is trying to be realistic and evaluate all programs, many of which operated on “autopilot” previously. This also gives fodder to critics of the HECM program who will use this development to argue that the federal government is taking a risk here that might be inappropriate.

    It also opens the door for us to engage the administration in a discussion on how the program might be modernized, including restructuring the MIPs to reduce upfront costs, by transferring more of it to the ongoing premium instead of the upfront charge today.

    These are very interesting times. It is very challenging to operate as a reverse mortgage correspondent (or lender) in this environment, but everyone must recognize that we are not immune from the broader issues swirling around us throughout the economy. The surge in state legislation, congressional actions, new appraisal procedures, Fannie’s margin changes and live pricing, OMB’s adjustment of home price appreciation assumptions, etc. are all plausible reactions to what is going on in our economy and our communities.

    At NRMLA, we see it as our role to help our members understand the dynamics snd navigate their way through change. Those who participate in our activities and read our communications, we hope, are better prepared to see what’s coming and prepare.

  • Hello Peter Bell.

    Thank you for the explanation. It was excellent and enlightening.

    However, much of the grumbling amongst originators in general might come from the fact that they had to come to Reverse Mortgage Daily to read your well written explanation, and have seen nothing on NRLMA’s website thus far this month other than some Learn-While-You-Lunch thing…

  • Cynic and Critic,

    Good to hear from you both. I know the both of you disagree with me on the infusion of capital into FHA. You now have me wondering if my opinion is on target or not. I respect the both of you and your knowledge of the industry.

    However, I feel that FHA can’t hold up with the onslaught of HECM loans being insured. Even though they are not paying out many claims, they do have reserve requirements.

    I realize FHA has a good reserve at the present. However, if the demand increases to the point they say it will and if the lending limit remains, the reserve requirement will be huge.

    Also, the value of homes have dropped tremendously. This puts a major strain on FHA’s reserves and credit performance on loans made, especially prior to 2008. If we want the program to continue without having FHA cutting off of the amount of loans that can be insured, this capital infusion will help to avoid that from happening.

    I may be dead wrong in my opinion and I stand to be corrected, but for now, I stand by my opinion.

    Take care and have a good weekend,

    John A. Smaldone

  • Does anyone else feel that lenders are dragging their feet on closing RMs until rates spiked? LIBOR 225 loans I submitted in March normally would have closed in 30 days with minor increases at the 250. Conditions seemed more like lame excuses for delay. Now we’re forced into the 275 and minor shortfalls have grown by 500%.

    Fannie Mae may bring other lenders into the market but destroy it in the process.

  • Where has all the MIP gone? Where is the accounting on those “losses” the FHA has had? Is this “real money” or more federal accounting trickery to confuse the taxpayer.

    I think it will come back to be a negative for the industry. Just my opinion.

  • Back to Peter’s comments. . . . Where is the accounting for the years that FHA had a positive cash flow from the government. If the program is from year to year and the profits fold back into the general fund, aren’t we just another federally subsidized program, not a federally insured program?

    If I understand what Peter wrote, FHA is not holding the insurance premiums in a growth fund of some sort to insure that FHA has the insurance money to pay out to lenders when the lender presents the loan for payment. The surplus premiums have been simply folded back into the general fund on a yearly basis. No wonder Barnie Frank thought he could earmark some of the MIP for housing projects.

    Can anyone else just wait to see what Senator Colburn does with this one? I agree with Peter’s assessment that “this gives fodder to the critics of the HECM program.”

    I too, as a member of NRMLA, would have preferred to hear about these things in a different forum, but I thank Peter Bell for the excellent, if slightly daunting analysis.

  • Government cash budgetary management and accounting for the HECM program on an insurance enterprise basis are two completely different matters. The budget is the allocation of cash expenditures between competing units of the government.

    Mr. Bell made it clear that the excess of MIP cash collections over cash expenditures in prior years was swept up into the Treasury. So in years that the HECM program has expenses greater than cash inflow, an amount has to be requested to pay that anticipated difference.

    But the real question is where is the accounting that shows the assets (even if they are nothing more than a due to/due from Uncle Sam account), known liabilities, estimated losses (as adjusted no less frequently than annually), accumulated net earnings, revenues, and expenses. It would be interesting to see the calculations as to the adequacy of the MIP collections compared to actual performance. For example, all of the HECMs issued in 1989 have probably all terminated. Comparing the MIP collections and other income to actual losses and other costs on a year by year basis would be helpful in seeing if the program is fulfilling its objective of providing insurance for the HECM program at a no net income or loss basis.

    Mr. Bell, here is a suggested session for the national convention — an overview of the HECM program from a financial prospective, its accounting, the budgetary process, and a verification of the adequacy of the current MIP rates. It might require more than one session but it would be interesting to some of us and would help us know what HUD is facing.

  • In response to Jim Veale’s comment that the accounting issues behind HECM would be a good topic for the Annual Meeting, I wanted to point out that this topic has been covered at the NRMLA “Road Show” conferences in Boston, Chicago and Orlando, with participation by Ed Symanoski, the HUD career official who was the original “architect” of the program. Dates are being determined now for the Road Show to be traveling to Seattle, WA in July and Austin, TX in September.

    The Road Show program, by the way, has received excellent reviews in all three cities. Many folks have commented that they enjoy the smaller, more intimate size of these events as an adjunct to the large gathering at the NRMLA Annual Meeting (which will be in San Diego the week before Thanksgiving.)

    In response to mktingreverse’s comment that folks have heard about this here on RMD, let me point out that member delegates hear about things directly from NRMLA via email bulletins sent out as things occur and our bi-weekly Monday Report e-newsletter. NRMLA is a membership organization created and supported by a number of companies to address policy issues and information needs and those companies are kept abreast of issues as they arise. Any employee of a NRMLA member company can become an additional delegate on their company’s membership for a very nominal annual fee and receive all member communications, plus a subscription to Reverse Mortgage magazine. Copies of our Monday reports and other communications are available on our nrmlaonline.org website, in the access controlled Members Only section.

    Our members generally understand that, for strategic reasons, we do not comment on certain matters while they are under discussion and negotiation with various policymakers. I find it is more effective to give policymakers the courtesy of listening to and digesting our input and responding accordingly before going public with comments.

    So, for example, I will never comment on actions under consideration by OMB while we are in discussions with them, nor do I discuss publicly our legislative efforts and strategies, whether federal or state, while we are at work on them. (We do report to our Board on issues in progress on a regular basis and seek their ongoing input.) However, you do see results as items such as the pending legislation in California inch their way towards more acceptable solutions.

  • A couple of questions:

    1)I don’t understand the dual statement that HUD has to have “reserves”, when it’s also stated that the excess MIP collections are swept into the general fund. Which is it… Are there RM funds held in reserve seperately, or are all the reserves held in the aggregate in the general fund, regardless of source?

    2) Why, when traditional FHA-insured loans reduced premiums periodically to account for the claims against the program, was this same practice not applied to HECMs? That practice may have resulted in overall lower MIP to the seniors in those years.

    3) Have any figures been published about the claims history of the forward FHA loan claims vs. reverse, and how much of the HECM funds were used to subsidize the forward side losses? Shouldn’t those two programs have seperate accounting so that senior borrowers are not paying the price for losses from young people in the forward loans?

    My concern is, and always has been, that the seniors are being asked to pay a disproportionate share of the insurance funding, when the accounting for the two programs should be kept seperate. Then, the HECM MIP could be reduced for the seniors, and raised for the forward side, if it can be shown that the HECM atnsurance covers or exceeds the costs of the program. Each side of the program should bear its own proportionate share of the costs for that program.

    It’s not right to ask seniors with no or few earning years ahead of them to pay the costs for young people that have lots of earning years, and the ability to work two jobs if need be to make their mortgage and insurance payments.

  • This has been a fascinating discussion. Everyone’s questions, comments and input have been enlightening in many ways, and more than anything else really emphasize a point that I’ve believed for some time – that we as an industry don’t have enough information to defend ourselves well in adversity, much less grow strategically in an enlightened, thoughtful manner.

    While there are way too many questions here to address all at once, my team has done some work answering several of the basic questions and addressing some possible implications of this issue. Look for a post on our site Sunday morning and signup for our newsletter if you’d like to receive updates as we publish.

    Situations like this one underscore our industry’s collective need for much better information to tell our story and factually present the benefits we bring to individual seniors and our society as a whole by offering dignity to our clients. Financial independence through reliance on individual financial assets like home equity is a noble pursuit, and with better information, we can prove that’s what our industry is about.

  • Having read all the comments above, it is still not clear to me of the MIP dollars go into an account that is ‘zeroed out’ at the beginning of each fed fiscal year, or if they accummulate (as they should)given the time lag between origination and repayment. Does anyone have a clear read on this?

    If it’s the former, the HECM program is guaranteed an unpleasant surprise once the MCA limit is rolled back or we come to a ‘dip’ in unit volume for a year or two.

  • This indeed has been a good preliminary discussion about the HECM program which should have taken place a long time ago. Mr. Bell provided a good overview of the reasons (both accounting and technical) for the request by the administration to subsidize the HECM insurance program. However, I must agree with Cynic in that more rigorous and thorough description of the assumptions that HUD/FHA have made in the development of the HECM program as well as some more light shed into the budgetary requirements and accounting procedures. Because no response was presented,I am going to attempt to summarize some of the assumptions inherent in the HECM insurance program, as presented by Edward J. Szymanoski in the Journal of American Real Estate and Urban Economics titled “Risk and the Home Equity Conversion Program”in 1994.

    As we all know the HECM program was created in 1987 as a demonstration program. As such it was placed under the General Insurance (GI) fund. The original methodology was developed by the Office of Economic Affairs under HUD. As for the basic premise of the insurance program, it is based on the following statement:

    (1) The Present Value of Expected Losses must be less than or equal to the Present Value of Expected Premiums.

    The expected premium is calculated using the schedule of the MIP charges that we are all familiar with, 2% of MCA plus .5% (annually) of the Outstanding Balance AND the probability function of loan survival (from actuarial tables).

    The calculation of expected loss is the area which has not been discussed outside of the technical forums given the mathematical background required to understand the basic assumptions (I will give it a shot here). In order for a loss to happen, you must have a loan termination, so the the probability of such termination must be known (this is carried out using the difference in loan survival probability) AND the Balance must exceed the House Sale Value (ie we must know the probability of this event, assumed to be a Brownian motion process). Finally we must also know the size of the loss (given the condition above) which is the Balance minus the Expected value of the House Sale subject to the condition above. It is in this last part where the home appreciation forecast play a role. HUD uses a memoryless (current values are used a predictors of future values) model to detemine home appreciation, the reason given that in the long run this model may still apply . So in the calculations of the model, a 4% Annual Home Value mean appreciation is used with a 10% standard deviation. Actually if you calculate yearly home appreciation for a relative long cycle (again this is geographically dependent) ie 30 yrs (with no inflation correction), this assumption is not that far off.

    In the calculation of Present Value, the expected rate at origination (which is fixed) is used in order to adjust for interest risk. The expected rate (based on 10 years cmt or libor) is interpreted as the market´s best estimate of implied forward one year interest rates (libor or CMT) and can be considered as a liquidity premium.By using the expected rate (including the margin set by the lender) to project ahead future loan balances, the model makes an estimate of the variation of note rates over time.

    Now the basic objective of the program is to determine what is the maximum cash advance the borrower can get given his age, home value and EXPECTED RATE so that the paradigm above (1) is satified. The principal limit factor (ie the percentage of the Maximum Claim Amount) is determined for each combination of age and expected rate using the method presented above. It is actually a trial ane error method, in which assuming a certain principal limit factor, the calculations are carried out assuming a single lump sum distribution, (ie cash out), summing all the losses and premiums from the time of the current age of the borrewer until the survival probability is zero and determining if (1) is satified. Otherwise, adjust the limit factor and try again until (1) is satified. This is how in the principal limit factors are calculated and tabulated in HECM manual 4235.

    As you can see from the above discussion, the model is really a risk neutral program (ie assumed to be a break even) rather than a profit based program. So technically, over the long haul, losses are balanced against premiums. The fact that the some folks want to look just at a short time period for the health of the fund is a little disconcerning. Studies published by HUD since then and others have shown the fund to be sustainable.

    Now as for the accounting methodology: if the program is still under the GI fund then by statue of the US CODE TITLE 12, CHAPTER 13,SUBCHAPTER V, § General Insurance Fund,paragraph (c) I quote:
    “(c) Deposit or investment of moneys; purchase of debentures
    Moneys in the General Insurance Fund not needed for the current operations of the Department of Housing and Urban Development with respect to mortgages and loans which are the obligation of the General Insurance Fund shall be deposited with the Treasurer of the United States to the credit of such Fund, or invested in bonds or other obligations of, or in bonds or other obligations guaranteed as to principal and interest by, the United States or any agency of the United States: Provided, That such moneys shall to the maximum extent feasible be invested in such bonds or other obligations the proceeds of which will be used to directly support the residential mortgage market.”

    So…., the moneys not needed by the current ( this mean yearly??) are deposited to the Treasury. This may be the problem, during the good years all the surpluses from the fund was sent away to Treasury, and now that we have projected losses then of course, there will be subsidies required. In my humble opinion, they should have made an exception for the HECM program given its assumptions and limitation.

    I hope I provided some more “meat” in this article, rather than treating the subject at the 50,000 ft level. Again a background in engineering certainly helps here.

    So the answer to the original question of whether is the subsidy really required should almost be a YES and NO. No because the program is designed to be self sustainable and YES because our laws really allowed this type of shortfall to happen and the money will be needed.

    Some folks have indicated their concern for the recent changes in margins of the HECM products. This is certainly a good but separate topic that is link both to economic policy and financial risk.

    It would a good idea to bring in some of the folks from HUD and FNMAE to have a good discussion and or corrections.

  • Mr. Torres,

    The problem with the self-sustaining attribute of the program is that at inception it did not look at extreme growth in volume, lending limits, long sustained drops in values, different borrowing habits when the amounts due exceed the home values, and several other factors. It is my personal belief that in the next four years terminations of HECMs endorsed in FYE 2004, 2005, 2006, and 2007 will greatly test, stress, and strain the long-term self sustaining alleged attribute.

    I am not aware of any updated economic models which have been employed to evaluate the HECM assumptions. I strongly believe and promote the idea that an independent evaluation of the sustainability of the program should be performed annually.


    Since the HECM program is being treated as an insurance program, the historical cost books of the HECM program should be segregated and follow the accounting rules for normal accounting of an insurance division within an insurance enterprise. The net due to/due from account related to funds going into and coming out of the General Fund should earn or accrue interest monthly at the 1 year CMT index rate; otherwise, MIP received from borrowers will be an interest free loan to the General Fund until that money is needed for program loss payouts. That does not sound like any insurance company I am aware of.

    I would hope that the HECM program is being charged for expenses incurred directly by HUD to run it along with an administrative fee for overall administration; otherwise, the program is already being indirectly supported by taxpayer monies. This program is great because it is designed to be self-sustaining. I hope it remains so.

    The budgetary request could have been for $5 Billion but as long as the monies not used in the program is swept up into the General Fund, who cares what the request is. I am sure most people want to believe it is reasonable but is it? The request is an estimate of monies needed in the current fiscal year; that probably a dice throw at best. What I would love to see is a comparison of the actual costs and losses to those projected. That information would be very meaningful.

    It would be very helpful if HUD would provide an annual accounting for the HECM program including a historical schedule of MIP income broken down by fiscal year of endorsement and upfront and ongoing MIP with expenses for fiscal year along with cumulative losses for the HECMs endorsed in that fiscal year shown in separate columns. Of course until all of the termination losses had been incurred, the loss for each fiscal year will generally be growing.

    It would also be helpful to see a schedule of projected losses yet to be recognized on HECMs by year of endorsement.

    Oh well, “if wishes were horses, beggars would ride” (Old English proverb).

  • Mr. Veale,

    I must admit, that before I looked at the HECM methodology mathematically I had the same concerns you have expressed. However, if we look at the HECM insurance program as a long term program, then it does account to a certain extent for all the veriables you have mentioned. Remember that the components of MIP are represented as percentages of the Max Claim Aount for the upfront premium and of the outstanding balance for the periodic premium, therefore allowing for scalability of larger loan limits and corresponding outstanding balances. As for the housing value appreciation assumptions, I would say that unless we undergo a long severe downturn in home prices (I mean 20 yrs or so), the model probably address the expected variation adequately. My point is that we just look at the next 4 or 5 years only, then the model would not make sense. Keep in mind the analysis is based on expected values of losses and claims, so unless the underlying probabilistic models are wrong it would be difficult to disproof mathematically the applicability of the model. There are however, other assumptions in the program that I did not go into, for example that loan terminations are independent of interest rates and property values. The one thing that they assume which is probably not quite true today is that borrowers would not be refinancing because of the relative large closing costs (at the time there was no MIP credit!!). They also made the assumption that HECMs would be adjustable rate loans which as we are seeing today we may have a period where fixed rate HECMS maybe more advantageous to the borrowers.
    As for validation of the data and methodology several studies have been published, (2000 and 2003 studies by David Rodda, which did take a look at loan terminations and “stress tests” and also as to the effect of HECM borrowers refinancing), Szymanoski took a look at HECM terminations with HECM data up to 2006 see “Home Equity Conversion Mortgage Terminations: Information To Enhance the Developing Secondary Market”,Cityscape: A Journal of Policy Development and Research • Volume 9, Number 1 • 2007 ). So we may need some more recent studies for data between 2007-2009, but so far it seems like the program did have a solid foundation. It would be nice to see some more disclosure on the accounting methodology used by HUD with respect to the HECM program as you do suggest.

  • Review of the White House (OMB) budget report for HUD makes an interesting observation page 39:

    “This account includes budget authority for General and Special Risk Insurance Fund insurance programs requiring positive credit subsidies. Unlike previous years, this account no longer receives appropriations for administrative contract costs, which is reflected by the considerable reduction in both total budget authority and obligation activities in 2010. Pursuant to the Housing and Economic Recovery Act of 2008 (Pub. L. 110-289), in 2009 the Department consolidated the bulk of FHA singlefamily programs under the Mutual Mortgage Insurance (MMI)fund, shifting several programs—including condominium mortgage insurance and Home Equity Conversion Mortgage (HECM) insurance—that had previously been administered through this account into the MMI fund.”

    Now the Housing and Economic Recovery Act of 2008 has the following language:

    (a) In General- Subsection (a) of section 202 of the National Housing Act (12 U.S.C. 1708(a)) is amended to read as follows:
    ‘(a) Mutual Mortgage Insurance Fund-

    ‘(1) ESTABLISHMENT- Subject to the provisions of the Federal Credit Reform Act of 1990, there is hereby created a Mutual Mortgage Insurance Fund (in this title referred to as the ‘Fund’), which shall be used by the Secretary to carry out the provisions of this title with respect to mortgages insured under section 203. The Secretary may enter into commitments to guarantee, and may guarantee, such insured mortgages.
    ‘(2) LIMIT ON LOAN GUARANTEES- The authority of the Secretary to enter into commitments to guarantee such insured mortgages shall be effective for any fiscal year only to the extent that the aggregate original principal loan amount under such mortgages, any part of which is guaranteed, does not exceed the amount specified in appropriations Acts for such fiscal year.
    ‘(3) FIDUCIARY RESPONSIBILITY- The Secretary has a responsibility to ensure that the Mutual Mortgage Insurance Fund remains financially sound.
    ‘(4) ANNUAL INDEPENDENT ACTUARIAL STUDY- The Secretary shall provide for an independent actuarial study of the Fund to be conducted annually, which shall analyze the financial position of the Fund. The Secretary shall submit a report annually to the Congress describing the results of such study and assessing the financial status of the Fund. The report shall recommend adjustments to underwriting standards, program participation, or premiums, if necessary, to ensure that the Fund remains financially sound. The report shall also include an evaluation of the quality control procedures and accuracy of information utilized in the process of underwriting loans guaranteed by the Fund. Such evaluation shall include a review of the risk characteristics of loans based not only on borrower information and performance, but on risks associated with loans originated or funded by various entities or financial institutions.
    ‘(5) QUARTERLY REPORTS- During each fiscal year, the Secretary shall submit a report to the Congress for each calendar quarter, which shall specify for mortgages that are obligations of the Fund–

    ‘(A) the cumulative volume of loan guarantee commitments that have been made during such fiscal year through the end of the quarter for which the report is submitted;
    ‘(B) the types of loans insured, categorized by risk;
    ‘(C) any significant changes between actual and projected claim and prepayment activity;
    ‘(D) projected versus actual loss rates; and
    ‘(E) updated projections of the annual subsidy rates to ensure that increases in risk to the Fund are identified and mitigated by adjustments to underwriting standards, program participation, or premiums, and the financial soundness of the Fund is maintained.
    The first quarterly report under this paragraph shall be submitted on the last day of the first quarter of fiscal year 2008, or on the last day of the first full calendar quarter following the enactment of the Building American Homeownership Act of 2008, whichever is later.
    ‘(6) ADJUSTMENT OF PREMIUMS- If, pursuant to the independent actuarial study of the Fund required under paragraph (4), the Secretary determines that the Fund is not meeting the operational goals established under paragraph (7) or there is a substantial probability that the Fund will not maintain its established target subsidy rate, the Secretary may either make programmatic adjustments under this title as necessary to reduce the risk to the Fund, or make appropriate premium adjustments.
    ‘(7) OPERATIONAL GOALS- The operational goals for the Fund are–

    ‘(A) to minimize the default risk to the Fund and to homeowners by among other actions instituting fraud prevention quality control screening not later than 18 months after the date of enactment of the Building American Homeownership Act of 2008; and
    ‘(B) to meet the housing needs of the borrowers that the single family mortgage insurance program under this title is designed ”

    Now it clear that the HECM program is now under MMI and by statue the program must be evaluated yearly and must meet operational goals. I dont think the GI fund had the same type of requirements. This may explain the reason why they now need the subsidy. My question is how they did they transfer the surpluses from the HECM program under the GI fund to the MMI fund??

    Again more questions for thought. I would ask if folks at NRMLA were aware at the time of negotiations last year with politicians and AARP that this legislation would put the HECM program under a different optic from a budget perspective?? It seems that from now on the HECM program is going to be tested yearly and certain unintentended consequences could be realized.

    Just more food for thought!!!

  • Mr. Torres,

    It is not the survivability of the program that is in question. Even if the validity of the model disintegrates, the question of survivability is clearly one of political will. It is the theory and claim of self-sustainability that are in jeopardy.

    If the model proves to be significantly flawed, the industry will need to pull out all of the stops and lobby “our friends” in Congress so that repercussions are minimized. The strong support for HECMs in Congress, particularly among Republicans, is in no small part due to its alleged self-sustainability.

    Simply put, I view the termination of HECMs endorsed between 2004 and 2007 (especially if the majority terminate within the typical seven to ten year period following endorsement) as the greatest immediate threat to the theory of self-sustainability on the horizon. Several within HUD believe that the segment of HECMs with MCAs between $417,000 and $625,500 with appraised values below $700,000 create the greatest immediate danger to this theory. Thus for many of us, it is the short-term that is of the utmost interest and importance. I personally expect to see losses rise sharply over the next five years with no perceivable deceleration in sight during that period.

    Having worked with mathematical modeling at Chevron Geophysical in the late 60’s, I am well aware of how effectively well designed models work. But as we all found out then, what is a well designed model today becomes outmoded at some point in the future. As to the HECM model, changes in 1) longevity, 2) the ratio of the youngest borrowers who are women, 3) borrowing habits and risk tolerance of HECM participates, 4) a substantial shift in the growth of the value of homes, and 5) many other factors — can significantly hamper and permanently erode the effectiveness of the HECM model.

    While the model may work well based on the current MIP structure, many of us believe that the current structure causes many seniors who would be immensely helped by HEMCs to turn away. Some of us also believe that the current structure reprehensively favors those who bring significant risk to the HECM program by subsidizing their risk based share of MIP with the MIP collected from those who bring far less risk. But all of that is beyond the subject at hand.

  • Mr. Veale,

    I am still having a little trouble understanding your logic here. The model is probabilistically designed to be balanced over the long haul. Looking at recent HECM termination data and expecting the number of claims to go up is expected as well as decresed housing values. The increase in higher loan limits are supposed to be balanced with the premiums collected. IF I understand you right, are you advocating for increasing the upfront and periodic MIP premiums from current levels of 2% and .5% respectively? If so, then please provide a stochastic analysis showing why this would be required. As additional source of info please see the relative recent presentation by Mr. Szymanoski here:


    It is a good source and at level that most folks can understand. Look at the liability analysis on page 18. Up to 2006 the actual data shows the program financially stable. You keep making suggestions, but I dont see any references that you have presented or analysis. Before shooting the program down or making statements about the sustainability of the HECM insurance program it is prudent to go thru the actual analysis and crunch some numbers. Even if the data for 2007-2010 shows a horrible increase in claims, one must keep in mind the longer term just as Szymanoski and others show in their reports.

  • Why not just have the upfront MIP set aside just like the monthly servicing fee and increase the monthly MIP by 1 or 2 points or let a private company charge a fee to insure the loan if it goes upside down and get the government out of the insurance business…

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