HECM Program 2012: Back in the Black, No Subsidy Needed

After two years of subsidy requests, the Federal Housing Administration’s Home Equity Conversion Mortgage program will not require additional financial support from Congress to operate in 2012 according to President Obama’s budget released on Monday.

The administration projects FHA will insure 75,027 HECM units totaling $20 billion of reverse mortgages in fiscal year 2012.

The last two budgets haven’t indicated as positive an outlook for the program. During the economic downturn, the Office of Management and Budget included a $798 million subsidy request for FY 2010, followed by a $250 million request for FY 2011.

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To ensure the program is cash flow-positive, the Department of Housing and Urban Development (HUD) made several changes to the program. In 2010, the agency slashed principal limits across the board by 10%, lowering the amount of money available to borrowers. The following year, it raised the mortgage insurance premium to 1.25% and lowered principal limit factors for older borrowers.

Another change was the introduction of the the HECM Saver, a lower cost reverse mortgage that provides less in proceeds to borrowers. With the launch of the Saver in October 2010, HUD said it would offset some of the HECM Standard risk and ensure the program broke even.

“Your ability to operate the HECM Saver and use it as much as you possibly can will enable us to keep the Standard alive and thriving,” said David Stevens, FHA Commissioner during a speech last year at the National Reverse Mortgage Lenders Association’s annual conference.

While there has been doubt about the success of the program, RMD reported in January that MetLife Bank’s proportion of Savers could be as high as 20% of its reverse mortgage business, providing a good sign for that goal, and for turning the HECM program into a cash flow-positive program.

See the full budget for HUD.

Written by Elizabeth Ecker

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  • NRMLA published its explanation of the budget today. It is interesting but it was also hard to follow since several of the explanations were so obviously wrong.

    For example, the NRMLA publication states: “The budget tables include $20 billion for HECM Maximum Claim Amounts, $4 billion less than is included in the FY2011 budget.” Forgetting about the grammatical issue, $24 billion may be the number used by the House last summer when they determined in their Appropriations subcommittee meetings that the needed positive credit subsidy was no greater than $150 million for fiscal year ending September 30, 2011 but that number is nowhere to be found in the budget document for last year. The budget document released on February 1, 2010 for the fiscal year ending September 30, 2011 in the first and second columns of Page 614 clearly states and shows a $30 billion dollar estimate for loans to be guaranteed not $24 billion cited in the NRMLA release.

    HUD seems to be expecting about one-third less endorsement volume for the fiscal year ending September 30, 2012 than it did for this fiscal year when the budget was released February 1, 2010. The number used in projecting the credit subsidy last year was just under 120,000 HECMs to be endorsed during this fiscal year, making its current prediction for the next fiscal year closer to 80,000.

    The NRMLA report states: “The Department of Housing and Urban Development section of the budget estimates HECM loan volume to drop to 75,027 for the fiscal year that begins on October 1, 2011, about a 5% drop off from the current year’s projected loan volume.” If the expected endorsements are 75,027 as the NRMLA document claims, HUD does not expect the volume to be significantly different from their announced prediction of 75,000 in its FHA Single-Family Outlook for October 2010. As RMD reported on November 19, 2010: “Since October is the start of the fiscal year, the report also shows HUD projections for FY 2011. For FHA’s reverse mortgage program, the agency projects … 75,000 endorsements with a max claim amount of $18.7 billion.”

    The NRMLA report had some insight that the article above did not provide. Mortgagee Letter 2011-10 increases the MIP on forward mortgages but specifically excludes HECMs. The second is a very serious concern; the recent report on GSEs which called for the increase now required in Mortgagee Letter 2011-10 also called for the end of the current lending limits. While Secretary Donovan promised to review the issue in the future, the lending limit could return to $417,000 as early as October 1, 2011.

    With ongoing MIP at 1.25% and continuing Principal Limit Factor cuts to those available on September 30, 2009, the HECM proposal could hardly be called good but on the other hand, at least we will have no further changes to the program on 10/1/2011 unless current lending limits are not extended past 9/30/2011.

      • 2545,

        I like your rumor mill better than the facts. While it is only the official interpretation of HUD on the issue, you will find one answer on Page 3 of Mortgagee Letter 2010-40. Here is the wording:

        “Under provisions of the recent Continuing Resolution (CR), the
        national FHA loan limit for HECM in 2011 remains at $625,500 (150
        percent of the national conforming limit of $417,000). In the special
        exception areas (AK/HI/GU/VI), the maximum claim amount on
        HECM mortgages is also $625,500. The loan limit shall be effective
        for all HECMs that have been assigned a FHA case number on or after
        January 1, 2011 through September 30, 2011.”

        Please note the first sentence is HUD speak for the fiscal year 2011 which ends 9/30/2011 as reinforced in the last sentence.

        There is a lot of nonsense in the industry about the cut off date must be 12/31 etc. by statute. If there is such a statute (sounds like someone pontificating nonsense once again), then I wish someone would point it out; however, if two statutes are in conflict, the most recent rules. Next we will hear it is in the Constitution or the Bill of Rights which requires 12/31.

        The lesson is do not believe what you hear.

      • I hear you. I was telling the informant that it was good till 9/30/11 as you point out. Although they insisted it was 12/31…I guess we will soon find out. It would hurt if they reverted back to 417K!

  • This is unexpected positive news! Nice to not have to worry about October 1st for the first time in several years. Can we get HUD to move the floor back to 5.5%?

    • Hey Matt,

      Some of us are quite concerned about the lending limit going back to $417K on 10/1/2011. So I do not understand your first two sentences.

      One way to achieve the floor rate concept you request is by simply copying the PLFs which apply at 5.5% to all lower expected interest rates. That would achieve what you requested but not what you intended.

      Your goal is to have the more favorable floor rates apply at 5.5%. The only way that can occur and keep the current table in tact is to shift the entire table by 0.5% and then apply the 5.5% PLFs to all expected interest rates less than that. I wish you luck on that one.

      • I would prefer the national loan limit permanently remain at $625,500 too, but that doesn’t sound likely. PLF’s impact my business far more than the national loan limit, because I rarely originate in markets with homes > $400K. Sorry if I’m alone in my excitement, but a reduction in PLFs on October 1st would have put a further dent in my business.

        My comment on the new 5% floor was tongue in cheek. I know that what we have now is here to stay. I don’t think HUD needed to make that move on top of adding the Saver and moving to 1.25% ongoing MI. With increasing interest rates we are going to feel the effect of that move all year.

      • Matt,

        I do not know where you were during the written sparing that has been going on over the last 21 months here at RMD but the HECM program is not in the shape that some of the industry spokesmen thought it was. They had only looked at things on a very questionable cash basis method of accounting not an acceptable accrual basis. It is not the HECM balance dues which are rising too quickly; it is the loss in home values which have put the HECM portion of the MMI (Mutual Mortgage Insurance) Fund in jeopardy.

        Fortunately the majority of outstanding HECMs should not terminate before home values make a return. If that is so, until home values return the current ongoing MIP rate and lower PLFs should keep things in line.

        Don’t give up on lower ongoing MIP and higher PLFs just yet. While I do not believe that PLFs will ever be as high as on September 30, 2009, we could see most of the loss being given back especially if home values start turning around in the next 18 months. Of course I do not expect to see PLF increases immediately but most likely within a year or so home values start rising.

        While the return of the $417K lending limit would not make any difference in the origination fee, many homeowners in the beach communities here would find the financial benefits of a HECM to be minimal and mediocre. To some extent it will make a difference on the backend compensation on fixed rate HECMs but even that financial incentive for most of us has been cut way back.

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