FHA Reverse Mortgage Program Sees Net Gain of $7 Billion Since Inception

National Reverse Mortgage Lenders Association President, Peter Bell, testified before the Subcommittee on Housing and Community Opportunity yesterday and discussed the state of the Home Equity Conversion Mortgage (HECM) program.

The session was meant to address the questions about the Federal Housing Administration’s future where FHA commissioner, David H. Stevens, assured lawmakers that his agency would not need a bailout and that it was managing its risks.

“Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, F.H.A. will not need to ask Congress and the American taxpayer for extraordinary assistance — we will not need a bailout,” Mr. Stevens said in his testimony..


While there was plenty of concern about the size of FHA’s possible losses, Bell helped to calm those fears in relation to the HECM program which according to a recent Congressional Budget Office (CBO) presentation has generated a cumulative net gain of nearly $7 billion for FHA since its inception. 

Accordingly, the HECM program has not played a role in FHA’s recent capital reserve account losses, Bell said in his testimony.

Bell also address the reduction in principal limits would he said comes at a great cost to some seniors who will not be able to utilize HECMs to preserve their ability to continue living in their homes, forcing them to move out.

You can read a copy of Bell’s testimony below.

Peter Bell Testimony

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  • I am glad Peter Bell had the opportunity to influence a Congressional subcommittee with regard to the solvency of the FHA HECM program. While he did say that the cuts put in place on the principal limit by HUD are part of the reason modeling indicates a solvent future for the HECM program, he at least pointed out that the very same cut precludes some seniors from availing themselves of reverse mortgages. That does leave a segment of senior homeowners very vulnerable at time when they have very few other options. I wonder if Congressional subcommittee members even gave a thought to what their own actions have cost these seniors.

  • Certainly Mr. Peter Bell did a good job in presenting our case. He is a great advocate for our industry.

    However, I disagree with the position that the $7 billion of MIP received net of losses paid out to date are any indication of real or true overall net profits from the HECM program. This amount allegedly represents the cash basis net profit from inception to the ending period reported by CBO. This is certainly not the net cash flow into the Treasury from the program. It completely ignores the current cash investment in assigned HECMs that HUD has purchased.

    Let’s not fool ourselves. If the program terminated tomorrow, the losses from existing HECMs (net of the future MIP that these HECMs will generate) could exceed the $7 billion that the CBO allegedly reported. That is the acid test of the true net profits from the HECM program. It is that number that reflects the stated goal of the HECM program to be overall net profit/loss neutral.

    If the program had $7 billion in overall net profit based on generally accepted accounting principles, I would be among the first to declare existing borrowers should be getting a refund and lowering all future MIP. The program could be operating at an overall loss right now; however, it does not appear that loss, if any, is substantial. To estimate that loss properly, independent actuaries should be issuing a separate report on the HECM program. Like the Administration, I do not trust CBO or HUD to provide truly unbiased information. But I also believe the Administration was terribly misguided to use an inflation rate plus one-half percent as the home appreciation rate in the OMB budget request for the fiscal year ending September 30, 2009, as alleged by HUD in a previously cited July 2009, GAO report.

    Using the Administration appreciation rate resulted in an indicated positive credit subsidy of $798 million. That estimate rate is not only irrational but it will harm many seniors unless Congress subsidizes this phantom deficit. The Administration needs to get out of the home appreciation rate imposition business. They need to support the President, not run every minute detail of the government. They have proved their incompetence once; let’s hope they do not do it again.

    • Why did you even include the first paragraph of your post? You should have written 2 posts. The first acknowledging what Peter's testimony might do for the industry and then another about the rest of the post.

      You obviously understand our business the issues that once addressed would go a long way toward helping. Why not take some time, do some creative thinking, brainstorm with other folks with your level of understanding and then present an approach to the issues that might have a real chance of quickly being implemented by regulators. Maybe you and other folks are doing that right now and will announce something big next week. I think something like this needs to be done. I don't have the understanding and political experience you have. I'm sure you know the people (not politicians) to get together with.

      We all know that doing the same thing time and time again with the same unsatisfactory results fits the definition of crazy, or whatever. I think we need to try something radical and widespread and well publisized that will attract the attention of a larger audience from the national as well as local political arenas, senior/boomer advocates, leaders in industry outside ours including other senior service providers and the media,and a broad age range of the public.

      People need to understand the broader societal good that starts at the funding of a reverse mortgage and how powerful the completion of many more than 100,000 would be.

      I think we can put the together to tools for a concerted effort from the above players to do something quickly an thoroughly thought out and not knee jerky so people can begin reading sensational headlines and news stories about reverse mortgages that have a positive bias. If not I think 2010 will be another very tough year that will lead to more ethical and professional people going elsewhere to make a living not to mention leaving thousand of seniors out in the cold.

      • floridareversemortgageguy,

        While appreciating your compliments, I also know my own limitations. I respectfully defer to the leadership in our industry as embodied in NRMLA and the MBA in matters of this nature. My employer is a member of both.

        Beyond knowing the financial situation within the industry it is even more important to have a pragmatic political view. Some believe that a key person behind the home appreciation rate used in the budget calculation might have been one Senator to whom the President owes much in regard to his nomination. No doubt there is some element of truth in that view.

        It was somewhat disconcerting to hear last week that the Senator has corralled a long-time friend to our industry, an influential House Committee Chairman, into a meeting where they allegedly will work together to provide more protections to seniors and taxpayers from the perceived abuses of unscrupulous lenders. A few months ago, it seemed highly unlikely these two particular lawmakers would be jointly working on such legislation; now it looks like it is only a matter of time.

        I share your view that much needs to be done to inundate media with positive real life stories about our products and how seniors have been helped. We also need accurate analyses of the financial consequences of reverse mortgages presented in articles of the most popular and respected magazines read by financial professionals and attorneys.

        Reverse mortgages should be promoted as tools for cash and debt management. Marketing should be developed demonstrating to working baby boomers how reverse mortgages can be used to reduce risk and costs. Old marketing and ads that were developed earlier in this decade whose main messages and motivation are little more than enticements need to end. Our marketing should embrace overall financial responsibility not some irresponsible idea that now you should rely on the house to take vacations, pay the bills, unrealistically improve lifestyles….

        Several I hear from share your predictions for the future. A few express even more dire views. Personally I believe in seasons in industry. It could very well be that loan officers experience winter in certain regions of the country for a few years before they enter into spring. Personally I hope we both prove to be overly pessimistic in this regard.

      • James E. Veale said:

        “I share your view that much needs to be done to inundate media with positive real life stories about our products and how seniors have been helped.”

        A loan officer I know recently ran a test study on an article posting site by posting informative articles about reverse mortgages and a positive story of how a senior was helped by a reverse mortgage. She ran the stories on the article posting site for a multitude of reasons, among which the fact that they provided tracking for how often a particular article got hits. The least hit upon article? The positive story about how a reverse mortgage helped a senior.

        We may be victims of our own media hype. If our industry does a media campaign of positive stories, we should be aware that many readers and watchers will view the stories as just more of the same advertisements they have seen in the past.

        The one exception I have seen recently was Mr. Smalldone's newspaper coverage. Apparently, unless there is a major drama attached to the story, i.e. a stopped foreclosure, there is no coverage. Reporters know what plays in Peoria.

        So, while I agree with Mr. Veale and the others in our industry who call for positive stories, we can put them out all day long — but first we need to figure out how to get people to look at them and listen.

  • I'd like to see the assumptions and methods used by the CBO in coming up with their $7 billion number. Assuming they are in the ballpark of realistic, $7 billion is a pretty large number! Hopefully this will have a positive impact on the program.

  • Peter Bell did a great job and did Jim Veale. The problem is the lower principal limit should stop immediately. The seniors are getting shafted.It is as I have said a Ponzi scheme by picking on new money to tax 10 percent from seniors who are supposed to be served. Just as I have also said taking 500 billion from Medicare to enable Big Goverment to serve 30 million more non-elderly is a joke perpetuated by the Dmocrat partisans including Obama. Obama has grabbed AARP to change their mission to seniors to help his takeover of some 20 percent of the economy simply a power grab that will mean fewer medical services for the frail elderly. Just read the polls the seniors don’t want this and they vote early and often just ask any election judge! November 2010 is coming with a sound judgement soon for this abuse of seniors benefits!

  • Excellent Job Peter, however I think NRMLA keeps missing an opportunity by not doing a study to find out just how many folks at risk of forclosure (currently past due 2 months) have had their homes saved by the hecm program. This would be a number that would really wake up DC.

  • My compliments to you Peter, job well done representing us as an industry. However, I must say that I feel James Veale outlined it perfectly, as only a true CPA could.

    As James points out, if in fact the program had an overall net profit of $7 Billion according to accepted accounting principles, borrowers should be receiving MIP refunds. I would also agree if this was fact that future MIP premiums should be lowered.

    The problem is, how can we trust the figures given out and the calculations used. What I feel we all agree upon is that the HECM program is not this terrible next sub-prime curse that will destroy the mortgage banking industry and bankrupt the agency. On the contrary, the claims and losses on the HECM compared to the traditional FHA product is miniscule. We are bound to see increases in the claims but not in a way that it would compare to the regular FHA program's.

    John A. Smaldone

  • I take Mr. Veale's point to be that the CBO's $7B positive estimate ignores the 'contingent liability' represented by the current portfolio of outstanding HECM loans, many of which are under water. Sobering thought.

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