$3.3 Billion of FHA Reverse Mortgages Underwater

Roughly 93,000 HECM loans, or 17.2% of the Federal Housing Administration’s reverse mortgage loans outstanding, are underwater by $3.3 billion total, according to analysis released today from New York, N.Y.-based New View Advisors.

The estimate is based on recent data from Department of Housing and Urban Development, which includes all HECM loans originated through January 2011.

The $3.3 billion figure compares loan balance to property value, New View explains, but does not account for property disposition cost.  More accurately reflecting the situation, New View offers scenarios factoring in 10% and 15% haircut amounts, leading to estimates of 135,000 loans (24.9% outstanding) underwater by $4.9 billion and 166,000 loans (30.6% outstanding) underwater by $6.1 billion, respectively.

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“HECM loans originated from 2005 through 2008 comprise substantially all of these underwater loans. In the 10% haircut scenario, they account for 91% of the underwater loans,” New View’s analysis says. “The 2006 and 2007 vintages are the worst offenders: each accounts for about 30% of the problem loans.”

The total underwater proportion of HECM loans at estimates between 17.2% and 30.6% compares with a recent report from CoreLogic, which estimates 23.1% of all forward mortgages are underwater.

The numbers will get worse before they get better, New View predicts. During the time over which the loans will pay off, growing loan balances and borrower advances, especially if combined with slow prepayments and a down housing market, will make the underwater problem worse, the analysis says. The underwater estimates represent how much FHA would lose if the loans paid off immediately, rather than over the next few years.

New View estimates the total value of outstanding HECM loans through January 2011 to be approximately $76 billion, and that about $7.3 billion negative net present value for the program since its inception, with the vast majority of the damage coming from the 2005-2008 HECM loan cohorts.

“If there is good news in all this,” New View says, “it is that the reverse mortgage industry has already undergone the painful process of reform, including reducing loan-to-value ratios (principal limits) and weaning itself off Fannie Mae….FHA’s FY 2012 budget predicts a modest surplus from newly originated HECM loans; this is a plausible estimate reflecting a more conservative HECM program.”

View the report from New View Advisors.

Written by Elizabeth Ecker

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  • “I am always amazed at how Wall Street is so easily fooled by statistics. …an exercise in form over substance.” The quotation is taken from an October 5, 2005 editorial by Mr. Peter Schiff titled “Figures Lie and Liars Figure” which can be found at:
    http://www.gold-eagle.com/editorials_05/schiff102005.html.

    While not quite as amazed as Mr. Schiff, the article by New View is highly inflammatory with little balance in its presentation. It seems more the work of those with an unspoken and hidden agenda than a disciplined look at the status of the HECM program. The New View article is certainly more balanced than the reaction of the industry almost two years ago when the Obama OMB announced that the HECM fund would need $798 million in subsidies to offset the losses projected for the HECMs expected to be endorsed during the fiscal year ended September 30, 2010. Mr. Kelly of New View was right on point back then. I applaud Mr. Kelly for his speaking out at that time.

    The April 25th 2011 New View Commentary while thought provoking in what is presented, is also deficit in what it does not. Notice the insurance revenues. If it was important to divide the losses into significant cohorts (and it was), why did the author not follow through and provide the same information about MIP revenues or at least describe why it could not be done?

    HECM accounting is far more complex than the author presents. There is a net arbitrage gain-or-loss for the assigned HECMs (inter-Departmental interest costs offset by interest accruing on those same HECMs) carried in the HUD HECM portfolio. There is also interest income being earned on the net cash inflow that MIP received by HUD has provided the U.S. Department of the Treasury over the last two decades. Unfortunately there is neither the time nor the space to continue on in this vein.

    But here is the heart of the criticism in this Comment. Without providing the impact to each HUD HECM fund (GI and MMI), the author appears to want to stir up reaction more than provide information which can be used to solve the problem addressed. For example, HUD already dealt with much of the concern the New View Commentary seems bent on stirring up by providing an allocation of over $1.7 billion from other HUD MMI Fund programs to the HECM MMI Fund during the last fiscal year. What was the purpose for not recognizing this allocation in the New View Commentary? Is that balanced?

    If more information, including assumptions, had been provided on how the losses were determined, there would have been an attempt to verify or discredit the numbers themselves. But coming back full circle, here once again is the quote from Mr. Schiff: “I am always amazed at how Wall Street is so easily fooled by statistics. …an exercise in form over substance.” Those words seem as appropriate in 2011 as they were in 2005.

  • Mr. Veale,

    Great commentary! Another ” The sky is falling ” article. When reading it the first thing that hit me was how come the MIP is not mentioned? I guess the article would lose the drama appeal if it wasn’t all negative! The below comment is not only misleading but reckless.

    “The underwater estimates represent how much FHA would lose if the loans paid off immediately, rather than over the next few years.”

    I will take it a step further. How much MIP ( upfront & ongoing ) has been collected since the inception of the HECM program. Do that calculation and then let me know if the program is underwater.

  • Mr. Veale,

    Great commentary! Another ” The sky is falling ” article. When reading it the first thing that hit me was how come the MIP is not mentioned? I guess the article would lose the drama appeal if it wasn’t all negative! The below comment is not only misleading but reckless.

    “The underwater estimates represent how much FHA would lose if the loans paid off immediately, rather than over the next few years.”

    I will take it a step further. How much MIP ( upfront & ongoing ) has been collected since the inception of the HECM program. Do that calculation and then let me know if the program is underwater.

  • I can’t compete with my friend James Veale on statistical presentations. Jim does one of the greatest jobs in this area as far as I am concerned.

    What I do known is that we have been in a severe down turn market since 2008. Yes, RM loans made from 2005 until 2008 were made on properties that were sky rocketing in values. When the crash hit and through present day, FHA and investors are stuck with many loans underwater.

    This is not the first time values have dropped. Yes, this is the worst we have ever experienced. HUD, FHA and our political leaders new this was bound to happen. Our government was the main cause for the crash. Since 1999 bills were signed into place that created a massivet growth of this nation that has been accomplished under false pretenses!

    You can’t grow an economy through the greatest accumulation of debt in the hands of the American people we have ever seen. This is what we did and the bubble was bound to “Pop”!

    Right now the agencies and the federal government is trying to cover their own doings over reverse mortgages by painting a bleak picture. They are saying in order to correct the balance sheets, on paper that is, we must drastically cut the benefits of the RM loan to our seniors. We must raise our reserves, we must do something about the HECM program before it is to late!

    What if values start rebounding and the housing market comes back? Now the circumstances will be entirely different. The problem is that we may not have a HECM loan by the time it happens. We also have to look at how many claims have been made on a reverse mortgage since 2008. Lets compare that to a traditional FHA loan. We do not hear the positives, such as, with a reverse mortgage we are not looking at the lack of income to make the mortgage payment as the default culprit. We mainly have to look at death! If the market turns, these loans will not look as bad. Sure, we have a lot of risk on those loans made between 2005 and 2008 before we see values go up significantly enough to ease any concerns.

    Talking about risk, the real risk and time bomb that exploded is what took place between 1999 and 2008. False growth of our economy and inflated home values caused by an 8 year rain of spending, buying and accumulating massive debt. Why was something not done by FHA, FNMA and the investment community to hedge the problem they new was on the horizon, why, some one please tell me that?

    John A. Smaldone

  • The report New View Advisors published last week was an economic (not accounting) analysis of the HECM program from inception through fiscal year (FY) 2010. The numbers in the report, and summarized below, take into account all MIP collected in the program’s history. We encourage viewers to read New View’s analysis in its entirety rather than editorial summaries to better understand our methodology and conclusions.

    -Until 2005, there was less than $500 million of total mortgage insurance premium (MIP) collected. The monthly MIP received by FHA didn’t exceed $100 million per year until 2007.

    -There’s been $144B of total Maximum Claim Amount (MCA) originated through FY 2010. That produces $2.9 billion of upfront MIP paid to FHA. ($144 billion x 2% = approx $2.9 billion.)

    -Total monthly MIP received through FY 2010 has been $1.1 billion.

    -Therefore, the total MIP collected has been $4 billion through FY 2010. A present value adjustment brings this to $4.5 billion.

    -The present value adjustment is relatively small because the vast majority of the MIP has been collected in the last four years.

    -FHA has suffered realized losses to date of approximately $400 million, our calculation from the FHA dataset, but not a big number.

    -As for future expected losses, the “Loan Guaranty Liability, Net” (LGLN) figures are taken from p62 of the FHA 2010 Annual Management Report: $2.673 billion in the MMI fund and $8.692 billion in the GI fund.

    -FHA’s definition of LGLN takes into account future monthly MIP, hence the “net.”

    In summary:
    $4.5 billion Total present value of MIP collected FY 1990-2010
    -$0.4 billion Less: total realized losses through FY 2010
    -$8.7 billion Less: projected net losses for FY 1990-2008 originations
    -$2.7 billion Less: projected net losses for FY 2009-2010 originations

    -$7.3 billion Total net present value of program

    • Mr. McCully,

      To be clear, there is no substantial difference between how accountants or economists project losses. As the partner in charge of taxes for a regional CPA firm, we used the work of not only economists but also actuaries in determining the size of projected losses and gains in many situations. Since New View has CPAs on staff, you are no doubt familiar with the use of experts by CPAs. Our difference is not over the work of a CPA versus that of an economist; it runs far deeper.

      With every economist I have worked with both at a Big Eight accounting firm and in industry at both a Forbes 100 company and as head of the income tax department of a Fortune 250 company, there were certain principles of projection we all agreed to. The same was true with the actuaries we worked with on the employee defined benefit plans of some of the largest multiemployer plans in the western United States.

      While the figures used in the New View Commentary should be verified, it is how that information was used that was and is a problem to this writer. For example it was strange that the gross losses were presented by grouping of cohorts of fiscal year in which the related HECMs were supposedly originated and then seeing MIP grouped by fiscal years of receipt. To determine the net losses at termination, both MIP revenues and losses must be grouped in exactly the same manner and the most logical grouping would have been by the fiscal year in which the related HECM was endorsed, not originated. Quite frankly, I know of very little financial data HUD provides that is by the fiscal year a HECM is originated. Whether it is financial reporting, budget estimates, or financial projections, the common grouping used by HUD is by fiscal year of endorsement.

      For example the sheer number of HECMs originated before October 1, 2008 is larger than the endorsements before that date. Why? Because not every HECM origination which occurred before that date was endorsed before that date; therefore, the number of originations before October 1, 2008 exceeds the number endorsed before that date. That is neither an accounting principle nor an economic concept; it is simple logic. So using the word originations when endorsements should have been used is a matter of improper labeling.

      Getting to the point of this and my prior comment, the trouble with the Commentary is that it points out what the size of the total net losses MIGHT be if the program was to be shut down today without pointing out what has been put in place to mitigate the impact of those losses. For example if the MIP generated to date on HECMs endorsed after September 30, 2008 plus the inter-Department interest on those revenues exceed $1 billion then based on the New View estimate of $2.7 billion related to HECMs “originated” after September 30, 2008 and before October 1, 2010, HUD has taken the measures needed to take of the Mutual Mortgage Insurance Fund with its reallocation of over $1.7 billion from other MMI program funds into the HECM portion of that fund. As to our industry the MMI Fund is our most immediate and important consideration.

      As to the HECMs “originated” before October 1, 2008, there is no overall net cash loss. All the financial activities related to those HECMs are reflected in the General Insurance Fund. Yes, it might be awful if all HECMs terminated today but that is NOT going to happen unless today is the end of the Great Tribulation or some catastrophic nationwide event is occurring today. Not one single cohort of HECMs endorsed in any fiscal year had fully terminated by January 1, 2011. This is the worst housing downturn in my lifetime. So is it reasonable to look at losses as if the program was going to terminate today or as if it terminated last week? Maybe, but only to understand what the magnitude of the net losses might be; however, in that case all HECM financial transactions should come into play.

      With that, what is the purpose of the recent New View Commentary? Is New View concerned about future endorsements? The cohort originated during the fiscal year ended September 30, 2009 had huge built in losses (as Mr. Kelly has so forthrightly pointed out) since the principal limit factors were the same as those for the fiscal year ended September 30, 2008. The principal limit factors for last fiscal year were much lower and the principal limit factors for the current fiscal year are lower yet (except for some seniors at the expected interest rates at the new floor or lower). HUD took the word of your fellow managing member, Mr. Joseph Kelly, and lowered principal limits accordingly and even began offering a new product with even lower principal limit factors.

      So what is it that New View is suggesting in its recent Commentary? Is it saying that principal limit factors should go lower? That makes little sense since the most HUD can make on its HECM transactions is the MIP income and any related inter-Department interest income on those revenues; any positive difference between the net sales price of the home securing a HECM and the balance due on the HECM belongs to the owner, not the note owner or HUD. Yes, there may come a time when Congress may have to provide funds to the GI fund but for now that amount is anyone’s guess.

      From the point of view of the industry, it seems the HECM portion of the MMI is on reasonably sound financially footing with a bright future.

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