FHA Report: Value of HECM Program Hit Hard by Home Price Projections

The estimated value of the Federal Housing Administration’s reverse mortgage program fell by $1.4 billion over the last year according to the latest actuarial review published by the Department of Housing and Urban Development.

“Our projections indicate that, as of the end of FY 2010, the HECM portion of the MMI fund will not have sufficient capital resources to meet its future liabilities and hence will require support from the overall fund,” said IBM Global Business Services, the company responsible for the audit.

In order to cover the net cost of the HECM FY 2009 book of business, FHA transferred $1.74 billion from the capital reserve account to the MMI Single Family program, bringing the capital ratio for the program from -4.3 percent to -0.98 percent.  The new estimate is a drastic change from IBM’s previous report, which put the value of the FHA’s 2009 portfolio of reverse mortgages at $909 million and enough to cover future losses.

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According to the IBM, the change is driven by three factors: discount rates, the house price forecast, and home maintenance risk.  “This year’s review projected a slower house price recovery for the nation than last year’s review.”

Rather than use the same data provider − Global Insight data − for home price forecasts, IBM turned to Moody’s.  Previous calculations used nationwide projections, while Moody’s data breaks it down to MSA levels and allowed IBM to zero into places like Florida, Texas, and California, where the HECM portfolio is concentrated

“The HECM portfolio is more concentrated in areas with higher forecasted house price decline and lower forecasted long term house price growth,” said IBM.  “As a result, this year’s review estimated lower future recoveries at loan termination, which suppressed the estimated economic value of the overall HECM portfolio.”

According to Moody’s forecast, the annual national house price rate will fall by 1.3 percent during FY 2010 and begin to rebound in the second quarter of FY 2011.  “The forecast suggests house price appreciation will rebound to the high four percent in FY 2014 and will return to around a long-run average of three percent,” said the report.

Once home values begin to rebound, so should the value of the HECM portfolio.

“We estimate the economic value of the HECM portfolio will subsequently increase over time with the addition of new books-of-business, the introduction of HECM Standard and Saver options in FY 2011, and improvements in forecasted economic conditions.”

Chart: Value of HECM Portfolio2

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Value of HECM Portfolio2

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  • Using a MSA approach rather than national averages is a tremendous step forward. Valuations emphasizing regional home price values are superior to the “one size fits all” methodology used in the past. It was a big hit to take this year but in the long run this method will produce a more better picture of the value of the outstanding HECMs at year end.
    HUD should consider rescheduling the field work of the actuaries so that it is done using historical year end information rather than historical information plus estimates for the latter part of the year. If not, HUD should consider having the actuaries return after year end to issue a revised report. Information from these reports is relied upon by many users. Using inaccurate data only magnifies any problems in the report.
    Due to the overestimate in the number of HECMs endorsed during last fiscal year there is little doubt the expected loss is overstated as well. Projections are a difficult and somewhat dangerous adventure at best. Using better data should help make the projected outcome of a fiscal year more reliable or at least a better informed estimate.
    My congratulations to FHA, HUD, and the actuaries for revamping their approach. Kudos to all. You do not always get the credit you deserve.

    • I agree with the current approach but wonder why these more thorough methods were not used previously. Any right-out-of-college analyst (I know because I was one) who forecasts knows about “weighting”. I won’t argue that there was an “agenda” attached to the previous method, but it does make one wonder……

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