Report to Congress Shows HECM Program Becomes Self Sustaining in 2011

A new report to Congress shows the Federal Housing Administration’s Mutual Mortgage Insurance Fund is sustaining significant losses from loans insured prior to 2009.

While its capital reserve ratio fell from 0.53 percent in 2009 to 0.50 percent in 2010 − below the congressionally mandated threshold of two percent − the report concludes that conservative assumptions of future growth of home prices will help FHA’s capital ratio approach two percent in 2014 and exceed the statutory requirement in 2015.

“It’s clear that FHA is in a stronger position today than we were just one year ago,” said FHA Commissioner David H. Stevens. “While we are not yet completely out of the woods, based on the evidence we’re seeing, FHA is weathering the economic storm while helping to create a firm foundation for our nation’s recovery.”


The difference is primarily attributed to the use of much more conservative assumptions regarding future house price growth than were used last year, which also resulted in an $8.5 billion decrease in economic value said the report.  However, that decrease was offset by a variety of factors, including an $8.7 billion increase in value due to better credit quality, loan performance, and the premium increase implemented earlier this year.


According to the report, the HECM program’s capital ratio fell from 3.17% in 2009 to -0.98 in 2010, causing a net decrease in the overall MMI Fund capital ratio. This is mostly due to conservative house price forecasts that show FY 2009 and FY 2010 reverse mortgage endorsements will not perform as well as previously reported.

“The remaining negative economic net worth for HECM ($503 million) is a result of actuarial projections that the FY 2010 book will itself not break even,” said the report.

The transfer of $1.74 billion from the capital reserve account of the MMI Single Family program to cover the expected net loss of the HECM FY 2009 book of business.  The change in house price forecasts also reduced the economic value of HECM loans by $3.9 billion.  However, recent changes made by HUD to raise the annual premium for reverse mortgages and the release of the HECM Saver will help turn the program around.

“Starting in FY 2011, the actuarial estimates are that each new HECM book will generate net income for the MMI fund and that the HECM portfolio will itself be providing more than two percent capital – per the statutory definition – in just two more years,” said the report.

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  • The news is very disheartening. If you are one of those who abhor your sales staff becoming worried by reading negative reports, black felt mark out almost every line of the entire report; you better get busy.
    Unlike SEC annual reports, this report does not contain audited financial statements. It is simply a limited self-assessment. But the news is very bad. Reading this report causes one to be more pessimistic about the future of the HECM program than the address FHA Commissioner Stevens presented at the NRMLA convention and that was bleak, especially when Admin quotes him saying: “…the agency was worried it could’ve lost the program….”
    The report shows that in twelve months the economic value of the HECMs in the Mutual Mortgage Insurance Fund (“MMI”) fell by over $1.4 billion (from a positive $909 million to a negative $500 million). That was the GOOD news. To prop it up to that level, over $1.7 billion (yes, not million) had to be allocated away from the FHA other programs to keep from having to show reduction as $3.2 billion dollar. Get it; the other programs are not robbing the HECM Fund. The HECM fund is robbing the other programs. To read some of the comments last summer, you would have thought HUD was stripping the HECM program of every dime just to keep other programs running.
    Well now for the bad news, if that was not bad enough. The only HECMs covered in the information above are the HECMs endorsed during the fiscal years ended September 30, 2009 and 2010 which were outstanding as of September 30, 2010. That is less than 200,000 HECMs.
    Now for the really bad news. Imagine how much worse the loss would have been if HUD had not reduced the principal limit factors by 10% on October 1, 2009. That action alone might have saved the program. So for all who questioned this action of HUD last year, toast HUD for their wisdom.

  • While I find the comment of The_Critic informative, it lacks a little “color commentary.”

    Valuations of this nature are based on many assumptions and variables. From logic it seems a large portion of the loss results from an overvaluation of the cohort of HECMs endorsed in the fiscal year ended September 30, 2009 (or the 2009 cohort). By number of endorsements it is over 45% larger than the 2010 cohort. Part of the loss is due to the higher principal limit factors used in determining the principal limits of the 2009 cohort. Thus the vast majority of the $3.15 billion dollar loss is attributable to the estimated value of the 2009 cohort provided by HUD last year.

    The current report exposes the problem of pointing to the year end value of the 2009 cohort shown in the report last year as a valid reason for not employing the 10% reduction to the principal limit factors. The prior report reflected the expectation that the 2009 cohort would provide net revenues on a discounted cash flow basis to the MMI Fund.

    Problems to some degree generally arise from variables selected and the assumptions upon which they are based. Our housing markets still remain too volatile to believe that the losses which will actually be incurred will end up materially the same as the amount currently estimated. Since it will be unlikely that a significant portion of the HECMs in question will terminate for several years, home values could turn around in the areas where these HECMs are most concentrated and greatly reduce or eliminate the anticipated losses on many of the HECMs in the two cohorts. So be pepared, changes will occur in the amount of loss currently estimated; the road could remain bumpy for some time.

    HUD did a good job with the Saver; however, secondary market acceptance is an issue which will be with us for some time. In the near term, a lot could be riding on the projected net revenues to FHA from an unproven product. Our industry needs to unite to move the Saver forward.

  • Self sustaining by when? It is difficult to believe that with such small projected volume and with the current housing market, the HECM program will be self sustaining so soon.

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