House Appropriations Bill Could Extend Higher Reverse Mortgage Limit

The House Appropriations Committee’s bill could lower the amount of money available to seniors using the FHA insured reverse mortgage product but the 162 page bill looks like it will extend the increased lending limit of $625,500 through FY 2010.

SEC. 235. FHA Reverse Mortgage Loan Limits for fiscal year 2010. For mortgages for which the mortgagee issues credit approval for the borrower during fiscal year 2010, the second sentence of section 255(g) of the National Housing Act (12 U.S.C. 1715z-20(g)) shall be considered to require that in no case may the benefits of insurance under such section 255 exceed 150 percent of the maximum dollar amount in effect under the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)).
This title may be cited as the ‘‘Department of Housing and Urban Development Appropriations Act, 2010’.

It was reported earlier this week that the House Appropriators instructed the Federal Housing Administration to cut the proceeds seniors receive when taking out a home equity conversion mortgage in fiscal year 2010.

Advertisement

Rep. Tom Latham, R-Iowa, took credit for the idea which would eliminate the need for the subsidy that HUD requested for the program earlier this year.  Below is a copy of the transcript from the hearing which includes Latham’s comments about the subsidy request and Donovan’s response.

REP. LATHAM: Okay. Just another item that’s kind of popped up — I think it’s — you’re proposing to continue the reverse mortgage program for seniors, even after it’s been shown to be a huge drain as far as on — on the taxpayer. And the program is not part of the basic mission of FHA, has never been implemented by the private sector. Moreover, many warned since the conception that the program was doomed to fail; now a lot of people believe it has failed and the department wants to continue it anyway. Why would you ask the taxpayer to incur $800 million — to incur such a huge long-term liability on top of all the other long-term liabilities, assuming — by programs that work?

SEC. DONOVAN: Well, first of all, I would say that particularly during this time in the economic crisis that the country is facing, which has been particularly difficult for our seniors, that the reverse mortgage continues to be an important opportunity for seniors to face these difficult economic times and to do longer range planning to support their health care and other needs. And we looked carefully at this and felt that it made sense to continue to support seniors during these difficult times.

Having said that, I would also note that the proposal that we’ve put forward was dependent on not changing the underwriting terms for the HECM program. There are some relatively simple changes that we could make which would limit participation in the program but that could offset that request for credit subsidy.

I would be very happy — I always look forward to our staffs discussing those options and making decisions together with the committee about whether we ought to make changes to the program. Again, we’re not advocating those, but there are options, whether it’s around the premiums or around effectively the loan values that seniors could take, which would enable the program to be credit-subsidy neutral in 2010.

Vote Smart Transcript

The bill still needs to be passed by the House and then Senate must pass its version of the Transportation-HUD appropriations bill, which it hopes to do prior to adjourning on August 7 for summer recess said Peter Bell, President of the National Reverse Mortgage Lenders Association.

When Congress returns in September, a conference committee would negotiate any differences between the two versions.

Join the Conversation (21)

see all

This is a professional community. Please use discretion when posting a comment.

  • I say that 800 million is money well spent to hold off a larger systemic tide and that subsidy won't continue once home values bottom across the country.

  • Someone please elucidate me. Are the points Sen. Latham stated true? If not, then, why doesn't Donovan correct him? Is this a drain on taxpayers, if so what is the “insurance” premium covering?

  • Mr Duck,

    No one really has any idea, as far as I know there is no data to support either side of the argument. If there is, it hasn't been made public.

  • I would sure like to see the accounting on all of the 2% Upfront MIPs and 1/2% annual premiums being charged on all od the HECMs out there… I just don't believe the program defaults are more than what is coming in. How hard would it be to get a true accounting? Is the money getting diverted to something else?

  • If this is the first subsidy request wouldn't that imply that the previous 19 years generated positive cash flow? Anyone know how much profit HECM has generated since day one?

  • Take a look at loan proceeds from 3 months ago and compare them to today and you will see there already has been quite a reduction in funds available to seniors…..so now they want to keep on cutting the dollars available…..keep on increasing the margins…..keep on making the fat cats fat….and keep on making it more difficult for seniors to survive…….way to go Washington

  • I suspect that during the vast majority of the last 19 years not only was HECM program “not a drain” but in fact, was a revenue generator for the General Fund. Remember, all of each year's HECM insurance profits from that year went into the General Fund for politicians to spend…..instead of staying in the Insurance Pool of money for future needs, like today. (Isn't that how SS broke as well?) To say that the HECM RM is a money loser, is incorrect when you take the history of how the fund pool has been used be the general fund over the years. How about asking the politicians to pay the insurance fund back for all those profitable years that they drained our pool fund “first”, before making those claims.

    • RSV,

      Cash flow and profits are two different concepts. Your comments refer to cash flow. As to cash flow, it is doubtful if anyone would disagree with your statements. Cash on cash, the program has added substantial amounts of cash to the General Fund. However, all of that cash and more could be required to pay the losses that could be incurred from the HECMs that have been endorsed in the past but are currently outstanding. In fact very few of the HECMs endorsed in the last few years have matured and terminated.

      As to those HECMs issued in 2004 and thereafter, a significant portion (if not the majority) of their MIP has been collected but very little of the losses that are currently pent up in those HECMs have been incurred. Profit is the difference between total revenues and all costs. No one knows what losses will ultimately be incurred from those pools of HECMs.

      Budgets are the projected overall profits from the HECMs that are estimated to be endorsed during that fiscal year. They are not projections of net cash flow that will result within that fiscal year. So for example, the $798 million loss is simply the total projected net loss that CBO calculated will result from all HECMs endorsed during fiscal year 2010 when the last HECM endorsed in that year terminates in the future (e.g. 2030, 2031 or some other year earlier or later year).

      Projected net cash flow would simply be the total MIP expected to be collected in a fiscal year (no matter what fiscal year the HECMs were endorsed) minus the losses paid out during (again without any regard for the fiscal year in which they were endorsed). The budget does not provide any cash flow information.

      The budget projection is calculated by CBO from interest rates it determines, home appreciation from OMB, and all other information from HUD. For the first time the HECM budget computation was calculated using OMB appreciation rates. This is probably the most significant factor why the projected loss is so large. However, the interest rates also play a factor. It would be helpful if HUD described and provided an estimate on the impact of their model enhancements.

  • Our elected officials in Washington, D.C. do not pay into Social Security (SS). I believe instead, they voted to obtain their retirement from “The General Fund” which in some cases allows them to receive monthly payments for life comporable to what they earned while “serving us”. If this is the case then my suggestion would be to get them to vote to retire on Social Security like the rest of us and survive on an average of $1000 per month. I suspect that they would fix SS very quickly and perhaps improve how General Fund proceeds are disbursed. Just a thought !

  • Mr. Veale

    Again, I have to claim, I am obtuse. Are Rep. Latham's remarks true? Are HECMs
    a burden on taxpayers? Or, is it an unknown? Perhaps, like true insurance, there are potential claims (and in this case there is no identifiable reserve)?
    In any event, people like Latham, should be corrected for the record if they use inaccurate jingoistic language.

  • dduck12,

    Claiming to be obtuse does not suite or become you. I fully doubt if that is the case.

    Representative Latham made statements that intentionally appealed to his base. Except in major televised Congressional hearing, few are given sufficient time to address all of the questions, comments, and statements made by Committee Members. Unless the respondent is a favored or prominent individual like Fed Chairman Bernanke or Larry Summers, witnesses and respondents are routinely told to give short answers and many times without warning are cut off. So wise respondents, like Mr. Donovan, usually chose their battles carefully — if they are permitted such luxuries.

    Here is what I know. Viewing the HECM program from a cash flow point of view, the program has experienced tremendous amounts of positive net cash flows based on the size of receipts each fiscal year and I am not aware of one fiscal year where cash expenditures exceeded receipts but I do not claim to have any specific or insider information. So the General Fund has appeared to benefit by this net cash flow each year.

    On an overall program profit basis, the HECM program was allegedly designed to break even or incur very slight losses. It was not designed to run at a profit. HECM program proponents have been actively promoting this position for years describing the program as paying for itself. The problem is, no one really knows where the program stands. Why?

    First let’s look at HECM MIP receipts for this fiscal year. The lending limit has increased dramatically and the number of loans is up once again, so collections on upfront MIP are enormous when compared with the first part of this decade. The total number of HECMs outstanding from endorsements completed in prior fiscal years has never been higher; so MIP collections on outstanding debt are at all time highs.

    Now let’s look at HECM loan termination losses. Based on past history, few, if any, losses have been incurred from the recently endorsed HECMs (those issued between 2006 and now, inclusively) since few of them have terminated or will be terminating in the current fiscal year. With so few HECMs issued before 2003, it is doubtful even if all of those outstanding terminated in 2009, the total losses would be that significant since their values still reflect significant growth in comparison to their balances due. As to 2003-2005, the number of endorsements was fairly low and some of these homes still have significant values when compared to the balances due; thus total losses incurred from terminations from this group in the current fiscal year would not seem to be overwhelming. So in total it is doubtful if all of the termination losses incurred during this fiscal year would exceed receipts.

    From a cash flow point of view, things look OK if not rosy for 2009 and most likely 2010. So who is subsidizing who as to cash flow? No doubt right now the taxpayers are doing well from the HECM program.

    From a profit point of view, things appear much gloomier. There are few MIP receipts that are due that have not been collected; however, no one really knows how large the potential losses from the HECMs outstanding actually are. A loss is only incurred when a HECM terminates and the bank is not repaid in full. So as more and more HECMs terminate over the next decade we will begin getting a clearer picture of where the program is on a profit and loss performance basis.

    If home values revive quickly, losses will be mitigated. If they erode further losses could be greater than many anticipate. The greatest these losses could be is the total balances due on all outstanding HECMs plus all termination costs. But those types of losses are improbable since that would require that at termination none of the related homes had any fair market value, a practical impossibility.

    The situation is like a business that has sold its entire inventory, has collected all of its receivables but few of the product costs have to be paid before the end of five years. It is sitting on a pile of cash. If the company had sold its goods for a high retail value, the company will most likely have significant profit but until its costs are determined, no one really knows.

    What if the product costs in the example above were based on actual vendor manufacturing costs plus an agreed upon percentage of those costs to allow the vendor to recover administrative costs and provide it with profits. Business owners would be anxious until the vendor disclosed what product costs actually were. This is much akin to the situation the HECM program is in at this point. The business owners in the example have their ideas about the size of profits or loss but no one will have exact information until the vendor is done compiling the information and the vendee has agreed to the results.

    In this observer’s eyes, Representative Latham (like others in Congress) does not believe the federal government should be moving more and more into the insurance business. So he cites the original mission of FHA and how few proprietary reverse mortgage products, originations, and lenders there are today. He then jumps on the projected loss for the fiscal year ended September 30, 2009. This is the first HECM budget done using appreciation rates reflective of current market conditions AND those OMB expects to see in the future; in the past HUD provided this information and used the same appreciation rate as underlying its Principal Limit Factors. For HECM program detractors, the current projected budget deficit is a dream come true.

    No matter how one looks at the program or the fiscal year 2010 budget, determining overall HECM program net profit or loss at this point requires significant speculation, estimates, and projections. Since HUD has little evidence from which to make the necessary projections, all it seems to be able to do is argue the necessity of the program (and it is) and why it is not a permanent subsidy program for senior homeowners based on the assumptions and rational it used in creating the HECM mathematical model. Without sufficient data it is difficult to counter the claims of Representative Latham.

    In some way if we were able to hold everyone accountable for the claims they are making based on available information, much of the noise we are hearing right now would die down. My crystal ball is cracked and cloudy so it would be good to hear from those with more specific information.

    In case this has not been explained elsewhere, the budget for the fiscal year 2010 reflects the net loss that the HECMs HUD estimates will be endorsed during the fiscal year ending September 30, 2010 will result in beginning with the fiscal year 2010 until the last HECM from that group terminates in some future year. It does not reflect any projected MIP or losses from HECMs endorsed in any prior or future fiscal year.

    Enjoy the rest of your weekend.

  • Mr. Veale

    Thanks for all your work on that response, it is appreciated and hopefully useful by your colleagues in the RM industry.

    My original post was meant to provoke some in he RM business that are constituents of Rep. Latham, to contact him and educate him to the social benefits that the RM can provide. It is not a drain on tax payers when a possible foreclosure on a senior is avoided.
    The taxpayer could wind up paying more through welfare and medicaid costs if someone is thrown out of their home.
    In general, not just on RM matters, I believe we should always contact these representatives on issues we disagree with them on.
    BTW: I understand that there is a new program to prevent foreclosures for people up to 25% underwater. What about saving some seniors, or is it just union members the administration is worried about?

  • Wow James! Thank you for the explanation.

    I have always been a mathematical person. I wanted a clear explanation and I got crystal!

    Once again, thank you.

  • We are going to be hurting if they do reduce the funds available (change in the formula). I already thought we would be hurting when inflation kicks in and our rates go up. The amount of funds available to seniors when rates go up is greatly reduced. Most of us have now noticed the difference rates make because of the margin hike. Although, that was only .75% or so…how about when rates are 3%-4% higher? Hopefully, they will make it so that the interest rate does not effect the amount of funds as much as it does now. Otherwise, in a few years we will all be looking for a new job because it won't make sense for seniors.

  • We are going to be hurting if they do reduce the funds available (change in the formula). I already thought we would be hurting when inflation kicks in and our rates go up. The amount of funds available to seniors when rates go up is greatly reduced. Most of us have now noticed the difference rates make because of the margin hike. Although, that was only .75% or so…how about when rates are 3%-4% higher? Hopefully, they will make it so that the interest rate does not effect the amount of funds as much as it does now. Otherwise, in a few years we will all be looking for a new job because it won’t make sense for seniors.

  • dduck12 and Mr. Smith,

    As of Friday evening, the House Democrats (almost on party lines) passed HR 3288. In that bill there is a mandate for the HUD Secretary to ” adjust the factors used to calculate the principal limit (as such term is defined in HUD Handbook 4235.1) that were assumed in the President’s Budget Request for 2010 for such loans, as necessary to ensure that the program operates at a net zero subsidy rate”. The Senate may pass this bill before the August Congressional recess leaving only the President to sign it; however, if the Senate amends any part of it or creates its own bill, differences will have to resolved and the revised or new bill approved by both the House and the Senate before going to the President for his signature.

    This is the fastest I have ever seen a bill introduced into committee (July 22nd) and passed by the entire House (July 23rd). You can see this bill and its history at the Thomas Library website.

  • dduck12,

    I do have one correction I would like to make on my discussion of the statement by Representative Latham. The fiscal year ending for the projected loss is 9/30/2010, not 9/30/2009 as stated.

  • dduck12 and Mr. Smith,rnrnAs of Friday evening, the House Democrats (almost on party lines) passed HR 3288. In that bill there is a mandate for the HUD Secretary to ” adjust the factors used to calculate the principal limit (as such term is defined in HUD Handbook 4235.1) that were assumed in the Presidentu2019s Budget Request for 2010 for such loans, as necessary to ensure that the program operates at a net zero subsidy rate”. The Senate may pass this bill before the August Congressional recess leaving only the President to sign it; however, if the Senate amends any part of it or creates its own bill, differences will have to resolved and the revised or new bill approved by both the House and the Senate before going to the President for his signature.rnrnThis is the fastest I have ever seen a bill introduced into committee (July 22nd) and passed by the entire House (July 23rd). You can see this bill and its history at the Thomas Library website.

  • dduck12,rnrnI do have one correction I would like to make on my discussion of the statement by Representative Latham. The fiscal year ending for the projected loss is 9/30/2010, not 9/30/2009 as stated.

string(113) "https://reversemortgagedaily.com/2009/07/24/house-appropriations-bill-could-extend-higher-reverse-mortgage-limit/"

Share your opinion