HECM Program Not Subsidizing the Rest of FHA Says Analysts

imageNew View Advisors published an interesting analysis on the risk profile of the Federal Housing Administration’s reverse mortgage program (HECM).

Using an actuarial analysis published by IBM in October 2009 and FHA’s Annual Management Report (AMR) for FY 2009, New View anticipates that we can expect a tightening of ending standards across FHA’s entire program, both forward and reverse.

For years there has been a group of people who believe that due to the frontloaded MIP structure of the HECM program, the cash generated has been used to subsidize other parts of FHA’s business. 

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However, New View writes that the dramatic increase in the HECM Loan Liability Guarantee (LLG) which is used to estimate the present value of projected income and costs make it clear that the HECM program is not subsidizing the rest of FHA.

According to the AMR, the LLG rose alarmingly from $19.3 billion in FY 2008 to $33.9 billion in FY 2009, up 75%.

HECM accounted for $4.4 billion of this increase, not an insignificant amount. Overall, HECM LLG nearly quadrupled, from $1.5 to $5.9 billion. This amount represents, in effect, the negative net present value of the HECM program, and exceeds the total amount of MIP ever collected. Most of this is concentrated in the GI fund, not the MMI fund. The AMR attributes says this “increase in liability is primarily due to the drop in house price appreciation projections … [which] results in lower recoveries from future HECM assigned assets which increase the liability.” True, but the reversal of fortune for the LLG surely also reflects the house price depreciation that began in 2007 and continued through FY 2009.

Therefore, given the uncertain state of the housing market, and its diminished capital position, FHA was justified in reducing the HECM principal limits says New View. 

Read the entire analysis at the link below.

HECMs: Are We Still in Trouble?

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  • This will most likely be the justification for yet another PLF reduction in 2010. Meg Burns warned of a future PLF at NRMLA's conference in San Diego last November.

  • This report is important message and warning for us all to take pre-emptive efforts, by letting our elected officials know of the need for “not lowering” the PLL limits any further. Explain the current impact the October increase had on seniors and tell them about your success stories of how you have helped save seniors homes, taken them out of BK, foreclosure, and just plain released their financial stress.

    Most of our elected officials have no idea just how important HECM's are to our senior population, unless we tell them! Once, they understand, you could see a complete shift in making sure the HECM plan stays viable and our seniors stay where they want to be; their homes!

  • I agree with Sam! We have to act in concert and make it clear to our elected officials that our seniors are being backed into a corner that, in some cases, can only be solved by a reverse mortgage. Now is not the time to lower the PLL further. There has to be better timing than to squeeze the senior population on Medicare, lower their Social Security benefits and then significantly reduce a source of cash they can receive through a reverse mortgage. Most of them are not spendthrifts. Their heating/cooling costs, fuel, and food costs are significantly increasing and their resources are decreasing. The government may be slow to see the results of the recent legislation, but those most affected, i.e. the senior population, are not. We need to make our politicians aware that party euphoria does not get them elected. And most seniors vote and vote their pocketbooks.

  • The current customers are being penalized for the lower values. Lowering the PLF will only create less premium collected. The current customers homes will most likely increase in value over time, which will eventually make up for losses of RM's done in the past.
    I support all of the above comments.
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  • Just to tack on a note to my previous post: I did not expect MA to do what it did in voting a senate seat held by democrats for over 50 years into the hands of a Republican, but I cannot not be surprised because it was a special election when less people vote and people who do are most often regular voters and the most regular voters in the US are seniors and seniors vote their pocketbooks. Party euphoria does not elect; voters do.

  • Just to tack on a note to my previous post: I did not expect MA to do what it did in voting a senate seat held by democrats for over 50 years into the hands of a Republican, but I cannot not be surprised because it was a special election when less people vote and people who do are most often regular voters and the most regular voters in the US are seniors and seniors vote their pocketbooks. Party euphoria does not elect; voters do.

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