Does FHA’s “Rosy” Reverse Mortgage Picture Need a Closer Look?

The Federal Housing Administration’s annual reports, released last week, provide projections that are still too “rosy” based on what Home Equity Conversion Mortgage program data suggests, a recent New View Advisors commentary states. In three important areas, the data deserves a bit more explanation in order to get an accurate picture, New View writes.

Aggregate changes to the FHA’s overall HECM exposure, FHA’s prepayment conclusions and its home price appreciation (HPA) assumptions (and the impact of tax and insurance defaults on future losses) all play a role in the accurate picture of the status program, according to New View, which cites two sources that have indicated expected future losses have also been “significantly understated” on the administration’s forward book of business.

“FHA’s $10 billion expected loss from its HECM book is likely low, based on overly optimistic HPA, loss, and prepayment assumptions,” the commentary states.

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For starters, the 2011 annual analysis from FHA covers only the Mutual Mortgage Insurance Fund, New View notes, and not the General Insurance fund, which still houses the majority of FHA’s reverse mortgage exposure. The MMI fund does include a portion of outstanding HECM value, but those were originated mainly after the real estate bubble had already deflated.

With respect to prepayment speeds, New View estimates prepayment rates for HECMs are around 4% overall (and 2% for the vintages during the housing bubble), while FHA estimated 6%. Further, the analysis states, if history is any indication, the assumption of FHA that home prices will rise 3% to 5% annually by 2015 is too favorable in the current climate. Finally, FHA’s 2.5% estimate of HECM default rates is low based on other HUD estimates that current default rates are closer to 8%-plus.

How far off the analysis actually is a guess at best, New View says, but the report fails to show an accurate worst-case, best-case and baseline scenario.

“Nonetheless, we emphasize that FHA has taken many of the proper steps necessary to reform the HECM program,” New View writes. “The reverse mortgage industry has reduced the amount it lends, weaned itself off Fannie Mae, and introduced financial assessment to minimize loss.”

Read the New View commentary in full.

Written by Elizabeth Ecker

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  • Although the New View article had problems, it was well written and did provide a counter picture of the HECM situation to that of HUD.  It was surprising it did not include any analysis on the transfers from the capital reserve fund.  The New View article used reasonable testing mechanisms but it lacked direct testing of the data  It also ignored trends or stratifying the HECM population base to validate things like the HECM termination rate per HUD.

    HUD seems to be expanding its analysis to include HECM concentrations geographically.  New View seems less comfortable with that analysis.

    All in all HUD seems to provide a better picture of the program within the MMI fund while New View provides a more overall picture of the HECM program including the General Insurance Fund.

  • New View takes a dramatic approach at looking at the outstanding HECM population.  If one uses a bell shaped curve approach to this discussion, New View is looking at the trailing tail as it drifts into a complete collapse in home values. 

    Is New View wrong to look at the outstanding HECMs in this manner?  Certainly not but it is rather pessimistic.  It is more like the bank stress test which is currently being used, too pestimistic to gain a good impression on how things will most likely develop.  The HUD approach is closer to what one should normally expect.

    New View is certainly right to question the termination rate.  The actuaries should have reviewed the termination rate chart for reasonableness in much the same way that New View did.  Looking at these numbers, HUD seems overly pessimistic.  Of course, one problem with lower termination rates means a larger outstanding HECM population subject to potential defaults.

    While taking New View to task in the past, although I do not agree with several of its conclusions, the content provides a check on how HUD and its actuary view our industry.  I am very glad New View is doing this.

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