FHA Audit Shows Credit Quality Improvement, HECM Liability Increase

The latest independent audit of the Federal Housing Administration shows the agency experienced better than anticipated credit quality of borrowers and an improved house price appreciation forecast in the short term.

The audit, prepared by Clifton Gunderson, estimates the liability for the Mutual Mortgage Insurance (MMI) decreased from $28,456 million at the end of fiscal year 2009 to $26,035 million at the end of fiscal year 2010.

While the short term price appreciation helps the MMI fund, the long term housing price appreciation forecast for HECM properties didn’t turn out as well.  According to the report, FHA has insured 650,591 reverse mortgages (HECM) with a maximum claim amount of $144 billion since the beginning of the program.

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Of these 650,591 HECM loans, 510,144 loans with a maximum claim amount of $119 billion are still active. As of September 30, 2010, the insurance-in-force (the outstanding balance of active loans) was $73 billion.  The HECM liability for fiscal years 1992-2008 increased from $4.753 billion at the end of fiscal year 2009 to $8.692 billion at the end of fiscal year 2010.

“The increase in the liability is primarily due to a less optimistic house price appreciation forecast for HECM properties in the long term and new estimates of current and future tax and insurance default cases,” said the report.

“The HECM liability is driven more by long term house price appreciations forecasts than short term forecasts. The drop in the long term forecast results in lower recoveries from future HECM assigned assets and the new estimates of current and future tax and insurance default cases increases the unpaid balance of these loans which increases the liability.”

According to Michael McCully, Partner at New View Advisors, the data found in the audit was expected.

“The magnitude of loss comes as no surprise, we warned of an $8 billion loss for the old cohorts in our blog,” he said to RMD in an email.  “This new data justifies FHA’s Principal Limit Factor reductions and other program modifications for fiscal years 2010 and 2011.”

After benefiting from nearly two decades of home price appreciation, the recent changes made to the program will “mitigate FHA’s future losses, assuming no additional material home price depreciation,” he said.

Even with the lower principal limits, McCully believes that senior homeowners continue to receive generous benefits from the HECM program.  However, the company remains concerned that slow prepayments could translate into higher crossover loss and the impact of taxes and insurance defaults.

To view the report, see here.

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  • On a preliminary basis, there is some important information in the numbers Admin presents. The first is that after 21 years, the number of outstanding HECMs is 78.46% of the total ever endorsed. (Since September 30, 2004, there have been over 530,000 HECMs endorsed.)
    Looking at the numbers endorsed (650,591) and the number still outstanding (510,144) as of September 30, 2010, it is important to remember that of the 140,447 which have terminated, some of them refinanced. It would be interesting to know detailed statistics about the refinances such as: 1) how many total refis; 2) how many multiple (more than one) refis, and 3) how many refis are still outstanding. Since refis are technically the same borrower at the same location, it would also be interesting to know how many HECMs are the same borrower but at a different location.
    As a retired auditor, I will not trouble readers with my theory on the loss yet to be incurred by HECMs endorsed before October 1, 2008, since those fall within the General Insurance Fund and not the Mutual Mortgage Insurance Fund. However, as a former auditor I find it hard to agree to any loss projections which are based on national averages when the distribution of HECMs is clearly disproportional to homeownership throughout the country. Such estimates seem far too biased since HECMs are so highly, disproportionately distributed in states like California and Florida. They should also be weighted for the size of the debt which would even be more weighted towards California.
    It would help to have detailed information on actual losses incurred to date presented by year of endorsement showing the actual number endorsed for the year and the number terminated to date with the corresponding loss. While that sounds easy, there are all kinds of allocations of expenses and other issues which would have to be worked out but knowing HUD that data already exists. If Commissioner Stevens and this Administration are serious about transparency, as to the HECM program this would be a great starting point.
    There is much other information which would be helpful in lobbying efforts which seem easy to analyze once the new HECM computer programs and system are fully in place with all data entered in including data on those HECMs which have already terminated. Right now all one can do is politely try to not go to sleep when reading or listening to some of the speculation that goes on about the potential HECM liabilities.

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