Congressional Justification Docs Detail Possible Changes to FHA Reverse Mortgage Program

The US Department of Housing and Urban Development published the 2011 Congressional Justifications for the FY 2011 Budget which provides more information regarding the OMB’s $250 million credit subsidy request for the Federal Housing Administration’s reverse mortgage program.

According to the Mortgage and Loan Insurance Program (FHA Fund) document, the HECM program in FY 2010 is estimated to bear a subsidy rate of -0.50 percent, yielding offsetting budgetary receipts.  However, the rate for fiscal year 2011 switches to +.83 percent, largely due to changes in economic assumptions.

In addition, it notes that the HECM reverse mortgage guarantee program credit subsidy rate is especially sensitive to the assumptions for future house price appreciation due to the loans’ extended average tenure and the rising outstanding balances that accrue during the life of the loans.

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The decline in home values has also adversely affected the projected credit performance of HECMs and therefore will require a new discretionary appropriation of $250 million to permit the guarantee of the estimated loan volume (119,000 loans).

The document also mentions the increase in the annual MIP for the HECM program from 50 bps to 125 bps which still needs to be approved by Congress and, if implemented, will not take effect until October 1, 2010 according to an alert from the National Reverse Mortgage Lenders Association.

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  • Nice.

    Proposed 150% hike in monthly FHA MIP, increasing interest rates on top of stagnant or falling home values.

    Way to protect the seniors. Politicians create the mess and then the folks pay for it. Unfortunately the folks really paying for it our our seniors.

    Gotta love the boys and girls under the dome in DC.

    • Save_The_HECM,

      Why do you blame Congress? This is a White House that has decided to attack the HECM program. They are doing it indirectly but they are doing it nonetheless.

      Congress does not propose the Budget; they propose the appropriations bills. When the President's party controls Congress, the appropriations bills are normally just a reflection of the Presidential budget. We have a long way to go before we see appropriations bills based on this budget.

      • Sorry Critic……I find it hard to fathom that the “White House” has purposely decided to attack a program that benefits one of the largest voting blocks the Dems have and now accounts for a whole 2% of the mortgage market. The White House may very well propose the budget, but lets be real here, it's the congressional power players, the lobbyists, and the corporations that have their hands all over that budget so everyone can go home and say” see we did do something about mortgage reform”

      • Bob,

        It is this Administration that claims it is not influenced by those forces. They forced HUD to drop the appreciation rate it used to compute the credit subsidy last year. The Administration did it again this year.

        So it is simple, the President proposes a budget. Then Congress considers using it (or not) to derive appropriations bills. The budget is not law nor does it become law. You are not the only one who falsely believes that the budget is anything other than a proposal by the President that Congress uses a guide (or not) in making appropriations bills.

        Just remember it is this Administration that proposed to cut Medicare in its health care bill. This is the problem that any constituency faces when it is just accepted that it will vote as block for one particular political party.

        This Administration is not the friend of seniors, at least not like when FDR and LBJ were in charge. Later this year I will be eligible for a HECM and as one senior, I am not a happy President Obama supporter.

      • We all like our entitlements, don't we? Even though in doing so we may mortgage our children's and grandchildren's future.

        Don't believe those who say we paid into it; therefore we're entitled. The average Social Security or Medicare recipient receives far more in benefits than he or she pays in (around three times as much).

        FHA-insured HECMs cannot be allowed to become another benefit. The program must pay for itself.

      • HECM_Dude,

        What you are missing is that some pay far more into SS and Medicare than they will ever receive. As an employer I paid far in excess of $25K per year for 20 years just into Medicare in behalf of my employees. If that money had been put into conservative annuities who much would those annuities be worth today several years after I left that business?

        On the other hand my great grandfather paid less than $10,000 into Social Security before he retired. He lived until he was in his late 90's. He died in the mid eighties. He received far more from SS than he ever paid in.

        I also had a friend who passed away two years ago and he received nothing out of it. So while your point is well taken, there are exceptions to almost every rule.

        The problem that many in this field do not see is that HECM MIP is based on the program being here for many, many decades. It will always have endorsement years, where losses will exceed the MIP that cohort of HECMs generate — but in most years, there will be profits which offset those losses. That is what is commonly called the long-term view of the program and its financial model.

      • Anybody can find anecdotes about this person or that who (along with his or her employer) paid far more into the system than they drew out. I had a friend who passed away at the age of 50; therefore he never drew a penny. The fact remains that in the aggregate far more benefits are paid out to current beneficiaries than they paid in.

        When Social Security was begun, the average life expectancy of the American worker was only 65, and the system was well-funded. Today, mostly because payments into the system have not kept up with changes in life expectancy and benefit increases, we face massive deficits as a result. Privatization is not a realistic option, from an economic or political standpoint. Therefore, meaningful reform means attacking everyone's sacred cow: benefits must be cut, and taxes will need to be increased. The sad reality is nothing will be done until it is too late and we have a crisis because everything that must be done is unpopular.

        How does this relate to HECMs? We have the argument that when we take the longer view, the FHA insurance fund will have sufficient profit years to offset the negative years. Perhaps. But the HECM program has been here only 20 years; during most of that time it grew exponentially, culminating it a massive number of endorsements during those years when home values reached their peak level.

        Today, many homeowners who took out HECM loans only three or four years ago already owe more on their homes than they are worth. Home values have stabilized only in some markets; in others, including those most affected by the housing crisis, some economists predict a second housing downturn. It is not difficult to understand the actions being taken by HUD/FHA to deal with this.

      • HECM_Dude,

        You obviously are extremely well versed in SS economics except for the fact that employees only pay in 1/2 of the total; employers pay in the other half. Employees should be receiving 2 times the amount they pay in. Now if reasonable earnings are added to that, three times would still mean SS should be profitable. The problem is, SS was forced to purchase government securities which historically did not keep up with inflation.

        So let's play out your theories. HUD has done absolutely nothing to change the program. If it initiated any changes, please point them out. The facts are HERA chnaged the category of HECMs within the Budget, the Administration required that lower appreciation rates be used in their budget projections, and Congress refused to fund the resulting positive credit subsidy. HUD did not want any of that to occur.

      • I should be well-versed — my degree is in economics. As a business owner, I am also extremely well-informed as to how Social Security and Medicare taxes are distributed between the employer and employee.

        Regarding the employer paying half and the employee paying half of the Social Security and Medicare taxes — it doesn't matter who pays them. The employer could pay all of it or the employee could pay it all. No matter how it's set up (self-employed persons pay both “halves” via self-employment tax), it's part of the employer's total employee expense, and it's constructively part of the employee's total income.

        By 2030, we are projected to have four workers supporting each Social Security/Medicare beneficiary. Everyone wants to enjoy the benefits, but no one wants to pay their true cost. The important thing to understand is that without meaningful reform, deficit spending on entitlements ultimately will cripple our economy. We, through our political system, must make difficult choices now, or our children and grandchildren will have no choices left to make in the future. Unfortunately, our voters (of any political persuasion) are not disposed toward rewarding their elected officials for doing what is truly necessary; therefore, I am not optimistic that the reform we need will happen before it becomes a major crisis.

        The assumptions that were used to create the HECM calculation formula were based on historical home appreciation rates dating to 1900 as well as mortality tables that existed 20 years ago. The use of an expected rate that varies from week to week (in the case of adjustable-rate HECMs) is a serious flaw, in my opinion. This was partially addressed by implementing the 5.5 percent floor. Unfortunately, it made the program more complex than it needs to be, and it forced originators to “game” the closing date in order to give the maximum principal limit to the borrower.

        One cannot predict the future with absolute certainty, and some of those assumptions have not worked out, at least recently. When Congress passed the legislation that created the HECM program, it was never anticipated that a subsidy would be required. HUD/FHA is charged with managing the program so as to keep it revenue-neutral. The Administration was only recognizing reality in in using a lower appreciation rate in its budget projections. I believe it acted responsibly on behalf of the taxpayers.

      • HECM_Dude,

        Was it you, the disguised economist, who made this statement: “The average Social Security or Medicare recipient receives far more in benefits than he or she pays in (around three times as much).” And ” The fact remains that in the aggregate far more benefits are paid out to current beneficiaries than they paid in.”

        And this is your response to showing how twice as much is paid into SS than what you indicated in the first sentence above? Some of us were math majors and still have trouble trying to understand what you, econ majors, are saying. Your income information is a little weak since the employers' half of SS is not considered income by anyone including the IRS.

        It is easy to understand why things have changed when you realize that the category in which HECMs are found in the budget switched from GI to MMI due to HERA. Too many of us are like the voters you describe; we were asleep at the switch or so happy with the positive aspects of HERA we missed its most negative aspect. Without the HERA switch, the actions of this Administration would be meaningless.

        I respectfully disagree. If the FHA HECM financial model is reasonably accurate and there will be swings in home values, how can you argue that this Administration has acted responsibly? If you believe that, then the HECM financial model must be scrapped and completely overhauled. Like most economists, you want it both ways.

      • One more time for those who don't (or refuse to) get it: Social Security tax is the same tax, whether it is paid by the employer or the employee. It is part of the cost of doing business. And more is currently being paid out in benefits and is projected to be paid out in benefits in the future than the total amount of tax being paid by all employers and employees, including the self-employed. This fact is not in dispute among those, both on the left and on the right, who are knowledgeable on the subject. What remains to be resolved is how to reform Social Security Security, Medicare and other entitlements.

        The HECM calculation model is deeply flawed and should be scrapped, in my opinion. The recent haircut and the one to come are making it worse. I'd like to see it replaced with something that is more transparent and easier for originators to explain and consumers to understand.

      • As to your concept of SS taxation, it is nonsense in my eyes. Income tax is charged on the employees' portion but not the employers' portion. Not all employees and not all self-employed pay SS taxes.

        I find your attack on the HECM financial model unwarranted and without merit. For those who understand it, it is transparent and relatively easy to use. For those with little math training, it is difficult if not impossible. But I believe that the underlying assumptions should be reveiwed for relevance annually.

      • Hey critic,

        Enough “blame the white house and not congress” When people complain, they mean the government as a whole.

        Michael Pinter

      • Michael,

        Most of us resent press coverage that condemns HECMs when in fact some individual rips off a senior and the crime has absolutely nothing to do with the providing of the HECM but rather the use of funds sometimes years after the HECM was originated. What you suggest is just the same.

        Your way of addressing this, provides confusion rather than clarity. Senator McCaskill did not provide the 10% problem; it was someone within the Administration. HUD did not create this problem like some think; it was the failure of Congress to provide funding for the subsidy that the Administration deliberately created. Again, the lack of funding was not the doing of Senator McCaskill.

        If the Administration had not created the apparent subsidy need, we would not be in the principal limit problem we currently face or the principal limit plus higher MIP we will no doubt face in the future.

        Put the blame where it belongs.

  • Not sure who's “fault” it is but it would be a whole lot cheaper for the White House or Congress to increase benefits to our seniors instead of having more of them on Medicaid or SSI or being foreclosed on. Of course not all of them are at this level of risk but to allow them to use more of their own proceeds (from the RM) to pay bills means less on the dole.

  • I have no problem increasing the annual MIP, but the recent 10% cut was ridiculous. Everything is based only on assumptions. The HECM program has never cost the government one cent yet. No one knows when these loans will terminate and therefore, no one knows where the real estate market will be when they do.

    Michael Pinter

    • I totally agree with you. I guess I'm wondering why they are lumping all scenarios into a single category. I can see why the feds could become leery about certain RM falling into foreclosure, so their logic could have been if we reduce the principal limit by 10%, this will cause some seniors to not be able to use the program.
      Someone needs to propose tiered program that should alleviate the risk factor.
      The following examples should receive a higher principal value than the current number because the risk for default is extremely low:
      1) Those seniors who are looking to get a RM whose house is paid for and simply wishes to have extra funds to pay taxes, HOA, and insurance.
      2) Those seniors who have just purchased a new home with no mortgage and wish the same as above. This group should receive a higher return since the new home will be under warranty for at least 2 years, will be energy efficient, should have lower insurance rates. Since these seniors will have really no upkeep to speak of all of the RM proceeds should go to pay taxes, HOA, etc. and give the senior extra money for medical bills and food. Your thoughts!!

      • Elio,

        What does the amount of existing debt have to do with the HECM program? If a senior with no debt on the property takes out a fixed rate HECM, how is the risk any different for a senior who has a mortgage with a LTV of 40% (or even 80%) and also takes out a fixed rate HECM? In both cases the risk to HUD is focused on the value of the home at the end of the loan versus the balance due on the HECM at that time.

        The only place your argument makes some sense is if you simply look at adjustable rate HECMs but even then if seniors see their home values plummeting, why wouldn't they take out all of the available proceeds? When home values are rising, the risk can be different but not always.

        I agree with those who see room for two categories of HECMs. It is hard to believe that there will not be a demand for the current HECM program for years to come. However, there is a need for HECM II as well. It would provide lower proceeds but it would also require much lower upfront MIP. With fixed rate HECMs, HECM II (or perhaps HECM III) would let seniors decide how much they need and would only provide that amount.

        If seniors choose a lower principal limit on their HECMs II than is available, why couldn’t the lowered upfront MIP be lowered yet further? In other words, if the requested principal limit is 70% of the maximum available, why couldn’t the lowered MIP be reduced by say 20%? Then if seniors later decided to up the principal limit to the maximum, the MIP calculation would be the same as it is now with a HECM-to-HECM refinance with maybe a $500 additional refinance fee.

        Maybe I am misreading your idea. If so, please provide more information.

    • Sorry, Michael, you tirade is way off. When the ongoing MIP is raised, by formula, prinicipal limits are lower. You need to read the NRMLA release earlier this month.

      It seems it is OK with you if seniors pay more for the product over time rather than upfront, just as long as you can sell the product with the prior proceeds. I have real trouble with that position.

  • Just where is NRMLA in all of this? It seems they want to take money from lenders to represent them but I do not see much representing happening. Likewise, I have not seen NRMLA step up to rebut all the negative press out there about RM these past months. Wake up NRMLA or you may be gone when there are fewer and fewer RM lenders left.

    Additionally, where is AARP in this? They and NRMLA should be putting daily pressure on congress to do the right thing by seniors.

  • I truly believe HECM is being targeted for extinction. The product will stay around at some level, but the numbers it will benefit it will be too small to grow a company. You will have the big players who pay telemarketers 8 bucks an hour with some licensed salary people closing the loans. And you'll have the medium range shops that beg LO's to work for them for nickels and dimes who will have huge turnover of young people that will never make a living soing this. Hence the growth of their firms will also be capped.

    I made good money doing this for 5 years. the writing is on the wall and it is time to move on. The real culprit is the big run up in values due to the artificial market created by credit default swaps. Now the chickens are coming back to roost.

    • Unfortunatlely I agree with everything you have said Sleepless in Saratoga. I am in your boat and many are happy we will leave in hopes of reaping the benefits of less sales reps. Although, when you have a product that is geared toward “a loan of last resort” you will also have less seniors doing the loan. Most loans I have done of the past 8 years have been for improving their life style not because they have no other choice. Good luck everyone…you are going to need with home values and interest rates. If you have the ability run numbers for a senior assuming interest rates are 2%-3% higher you will be depressed how much they will then qualify for.

  • Despite the nightmare created by the CDS's, the reason I remain optimistic about the program is that given what is likely to happen to Soc. Sec. and Medicare combined with the fact that some 80% of baby boomers have not adequately planned for retirement means that the government is looking down the barrel of a loaded gun. Much better to allow people reasonable access to their primary asset and use their own money wherever they can find it, to fund retirement. Of course, this isn't going to be helped by raising MIPs/reducing principal limits and making the product even less attractive.
    2545's estimate of a 5-7% hit is pretty on target. It's not getting easier that's for sure.

    • Very interesting discussion. One of the central problems is the valuation of homes. I would suggest you look at the attached video, where the FDIC gives incentives to One West Bank, the successor to Financial Freedom to encourage short sales and foreclosures, instead of loan mods. As long as this type of arrangement is perpetuated we will be in a continuing downward spiral of housing values. Please watch:http://www.thinkbigworksmall.com/mypage/player/tbws/23622/1158084
      Thanks,
      <Ahref=”http://www.fhareversemortgagesofsouthflorida.com>reversemortgagessouthfloridaFHAhud

      • I saw the TBWS video and I think it is indicative of a lot of problems with the “bailouts”

      • The FDIC's reply seemed to me to acknowledge most of what the TBWS video said. The only issue they disputed was whether the FDIC had asked the Treasury for funds (which they can get anytime.) The fact that Onewest only owns 7% of the portfolio that they service means nothing to me. The fact that OneWest only gets the FDIC's help after they lose $2.5 Billion only makes the story worse in my eyes because it incentivizes them to lose a lot so that they get a Multi-Billion dolar payout from the taxpayers.

  • One more time for those who don’t (or refuse to) get it: Social Security tax is the same tax, whether it is paid by the employer or the employee. It is part of the cost of doing business. And more is currently being paid out in benefits and is projected to be paid out in benefits in the future than the total amount of tax being paid by all employers and employees, including the self-employed. This fact is not in dispute among those, both on the left and on the right, who are knowledgeable on the subject. What remains to be resolved is how to reform Social Security Security, Medicare and other entitlements.nnThe HECM calculation model is deeply flawed and should be scrapped, in my opinion. The recent haircut and the one to come are making it worse. I’d like to see it replaced with something that is more transparent and easier for originators to explain and consumers to understand.

  • As to your concept of SS taxation, it is nonsense in my eyes. Income tax is charged on the employees’ portion but not the employers’ portion. Not all employees and not all self-employed pay SS taxes.rnrnI find your attack on the HECM financial model unwarranted and without merit. For those who understand it, it is transparent and relatively easy to use. For those with little math training, it is difficult if not impossible. But I believe that the underlying assumptions should be reveiwed for relevance annually.

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