HUD Secretary: HECM to Generate $304 Million of Receipts in 2012

Helped by the Federal Housing Administration’s new HECM Saver program, the agency expects the program to be cash flow positive for the first time in two years.

“Designed as a second reverse mortgage option for senior home owners to tap into their equity, the HECM Saver product has lower upfront loan closing costs and is optimal for homeowners who want to borrow a smaller amount than that which would be available with a HECM Standard loan,” said Shaun Donovan, Secretary of the Department of Housing and Urban Development during testimony before the Senate Appropriations Subcommittee on Transportation, HUD, and Related Agencies.

Using the HECM Saver, borrower have access to home equity in amounts that are between 10 and 18 percent less than would be available with the HECM Standard option. “The reduction equity take-out for Saver substantially lowers risk to the FHA insurance Fund, and thus permits the virtual elimination of the upfront premium charge,” he said.

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Donovan said the President’s budget estimates that the HECM program will generate $304 million in receipts during fiscal year 2012.

Overall, an actuarial review published earlier this year showed FHA’s total capital resources increased by $1.5 billion to $33.3 billion during FY 2010.  The number would’ve been higher, but after a but after a FY 2009 re-estimate for the HECM program, HUD shifted $1.7 billion in capital resources from single family to bolster the HECM program’s reserves.

“On a standalone basis, had capital resources not been shifted from the forward loan accounts to HECM accounts to cover HECM budget re-estimates, the capital ratio of single-family forward loans (96% of the portfolio) would have increased from 0.42% in FY 2009 to 0.79% in FY 2010, demonstrating significant improvement in loan quality and underlying reserves,” said Donovan.

Incorporating conservative economic forecasts, the capital ratio for the entire MMI Fund is projected by the independent actuaries to exceed the 2% statutory requirement early in 2015.

“Furthermore, we have implemented a wide range of additional policy actions that are expected to strengthen the Fund even more quickly than forecasted,” said Donovan.  “While we are not yet completely out of the woods based on the evidence we’re seeing, FHA is weathering the economic storm.”

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  • It is important to realize that the supposed surplus is mythical and conjecture. Who knows if after 30 years or more whether or not the endorsements completed in the last 6 plus months and yet to be completed over the next five plus (referred to the FY 2011 cohort) will produce a net gain or loss as defined in the budget report released earlier this year? The over $300 million we are hearing about is now more than a budget projection which our industry thrashed because of net losses projected for the FY 2009 and 2010 cohorts.

    The way this projection is being treated you would think all of the Big Four accounting firms had performed separate audits and found no material errors in well documented historical transactions and that not only had the HUD OIG signed off on it but so also had the GAO. I have never seen such a high percentage of industry leaders rally behind a projection to which they have no “inside” information. While the projected negative credit subsidy is very useful now, such over promotion of this number could become a problem when seen from a historical perspective years, if not, decades from now as sufficient numbers of HECMs in this FY 2011 cohort terminate to reach such lofty conclusions.

    It is interesting to see some of those who attacked the budget projections on the FY 2009 and 2010 cohorts now proclaiming the “truth” of the budget on the FY 2011 cohort. What if the budget projections for the next five years show positive credit subsidy amounts, will we see and hear such proclamations? I think not. In less than ten months, the next budget is due out. What might seem like a political advantage now could end up being the creation of our own worse nightmare then. Beyond all that, no one knows if the changes HUD made to the program over the prior two fiscal years took the program from possibly negative to possibly cost neutral. Again that will not be known for many years, if not decades, into the future.

    Let’s put it another way. The same leaders who proclaimed for years that the T & I default rates could be no more than 1% are now proclaiming how strong the program now looks based on government budgetary projections, not historical fact, something that could prove to be our own undoing when it comes to waging battles over the budget in future years.

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