Former FHA Commissioner: HECM Budget Shortfall Amounts to Rounding Error

NewImage.jpgWith a $250 million budget shortfall for the Federal Housing Administration’s reverse mortgage program, former FHA Commissioner Brian Montgomery told the Spokesman Review it’s a “pivotal” year ahead for the reverse mortgage industry.

Montgomery has always been a big supporter of the program and says the product “helps solve a social need” for seniors who need to tap the equity in their homes.  “Because of cash shortfalls in the program, the amount seniors can borrow will be reduced for the second time. In the big picture, the number we’re talking about amounts to a rounding error in the federal budget.”

The rounding error that Montgomery is referring to would have a huge impact on the reverse mortgage industry.

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Without an appropriation from Congress for FY 2010, the US Department of Housing and Urban Development was forced to cut the principal limits by 10% across the board.  As a result, endorsements are down 39% from the previous year according to data from Reverse Market Insight.

“It’s a pivotal year for reverse mortgages and HECMs because of all that’s gone on,” said Montgomery, who stayed on as FHA commissioner through the first six months of the Obama administration in 2009. “Seniors look at all these layers that start with the bad press and become reluctant about participating.”

Former FHA official predicts ‘pivotal’ year for reverse mortgages

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  • Former FHA Commissioner Montgomery is a great supporter of the HECM program; however, he is terribly wrong on how he described the needed appropriation. Since the appropriation request relates to HECMs that are projected to be endorsed during the fiscal year ending September 30, 2011, how could there be any cash shortfall? Unfortunately this is probably the only way he could quickly describe it to his audience.

    The original appropriation request was exactly the same as the positive credit subsidy amount shown for the HECM program in the President's budget for the 2011 fiscal year; however, the House Appropriations subcommittee overseeing the HECM budget has determined that the subsidy and requested appropriation should be lowered from $250 million to $150 million and has agreed to fund the revised amount. As we are all aware, this is just the start of the budgetary process.

    The positive credit subsidy amount is the discounted value of the projected net losses that FHA is estimated to incur over the years that all of the HECMs endorsed during the 2011 fiscal year are anticipated to be outstanding for budgetary purposes. The projected net losses are strictly those related to the cohort of HECMs that will be endorsed during the 2011 fiscal year and that cohort alone. The net losses are discounted to October 1, 2010. The positive credit subsidy is based on the current 10% reduction to principal limit factors remaining in place at least until September 30, 2011, as well as an increase to the ongoing MIP from its current 0.5% per annum to 1.25% per annum on that cohort of HECMs alone. To be clear, if the MIP is increased for all HECMs endorsed during the 2011 fiscal year as assumed, the result will entail lowering the principal limit factors slightly further. However, the MIP cannot be increased until Congress grants that right to FHA through current pending legislation and once passed by Congress, the President approves it.

    While the size of the originally requested appropriation may be the size of a rounding error in the budget process, to get to that “rounding error” amount principal limits must be reduced slightly further and the ongoing MIP cost will increase significantly. All of this will have a greater negative impact on borrowers and will have a negative impact on our industry.

    Even worse, there is no word if Congress will increase the lending limit on January 1, 2011 when by law it will return to $417,000; right now as we all know it is $625,500 through the end of calendar year 2010. Some industry leaders expect Congress to make the lending limit $550,000 after 2010.

    What a great year to be in this industry!!!!!

  • Brian Montgomery is restricted from lobbying for one year after he left the office of FHA Commisioner, and I believe that year is about to expire.

    I think it would be a great move by NRMLA to have Brian represent our industry on “the hill”. He certainly has the passion for the product and he definitely has the connections.

    Even better, hire Joe Murin too!

  • Brian Montgomery is restricted from lobbying for one year after he left the office of FHA Commisioner, and I believe that year is about to expire.rnrnI think it would be a great move by NRMLA to have Brian represent our industry on “the hill”. He certainly has the passion for the product and he definitely has the connections.rnrnEven better, hire Joe Murin too!

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