HUD Open to Raising FHA Insurance Premiums Again, If Necessary

With its MMI Fund capital reserve ratio well beneath the Congressionally mandated level of 2%, the Federal Housing Administration (FHA) is in danger of needing a taxpayer bailout if the housing market keeps declining, according to its acting commissioner in November. The agency is looking into some potential policy options that would support the Fund, including insurance premium increases, said Department of Housing and Urban Development (HUD) Secretary Shaun Donovan.

The FHA was blasted for its 0.24% capital reserve ratio at Thursday’s House Financial Services Committee Hearing, Perspectives on the Health of the FHA Single-Family Insurance Fund, during which Donovan listed five primary areas of focus to ensure better Mutual Mortgage Insurance (MMI) Fund performance going forward.

Insurance premium increases topped the list, which also includes lender enforcement, loss mitigation, requirements for borrowers, and REO and pre-REO recovery.

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“FHA is constantly evaluating the appropriate level of premiums given the potential risks to the MMI Fund, and any action regarding premiums will be considered in the context of balancing access to credit in today’s economic environment with the need for added revenue generation to protect the Fund,” said Donovan in his written testimony that was submitted to the Committee members. “This is a delicate balance, but we know we must first and foremost protect the Fund’s resources so that its programs remain continually available.”

The fiscal year 2011 Annual Report to Congress on the financial status of the FHA’s MMI Fund revealed that its capital reverse ratio had fallen still further from 0.50% to 0.24%, and the agency’s acting commissioner Carol Galante wrote in letter to Congress that the FHA could potentially need a bailout if the housing market continues to slide.

In 2010, the FHA raised insurance premiums three times, leading to an increase of $1.37 billion in the FY 2011 economic value of the MMI Fund, while not affecting housing affordability, Donovan said in his testimony.

The HUD secretary did not specifically mention the HECM program in regards to possibly raising insurance premiums, but the program will not necessarily be excluded as a HUD spokesperson confirmed the department is evaluating a “number of possibilities” with more information to be announced soon.

Insurance premiums for the HECM program were raised from 0.50% to 1.25% in October 2010, which Henry V. Cunningham, Jr., who testified on behalf of the Mortgage Bankers Association, called a step “towards ensuring that the HECM reverse mortgage program remains a viable financing option for seniors.”

Changes to the program are necessary, several Committee members emphasized.

“If we’re not careful, it could become Fannie and Freddie, the Sequel,” Representative Jeb Hensarling said during the hearing, after calling the agency a “disaster in the  making.”

Written by Alyssa Gerace

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  • Hopefully, additional increases to MI premiums won’t be necessary. Previously, one of the benefits to FHA MI was that it was less expensive than PMI. As it increases, more borrowers who can choose, will opt for conventional financing with PMI. This leaves that segment of mortgagors who cannot choose staying with FHA because they can’t do anything else. Increasing the ratio of potential defaults, as those better qualified borrowers go elsewhere for their home financing needs. I know this is a “forward” problem, but if bad forward mortgages put FHA into trouble we’ll be drug along for the bumpy ride.

    • Eric,

      Please see my comment to wealthone.  I do not believe what the Secretary stated is just a forward program.  For the last two fiscal years, the HECM program has not been self-sustaining.

  • Even Congressional members of the Democratic Party are beginning to question the answers the Secretary is providing.  With no real evidence housing values will bottom even in 2012, it is time for the Secretary to be more forward thinking. 
     
    It is ridiculous that subsequent borrowers are being asked to pay for the losses of mortgages endorsed in prior years.  Appropriations should be requested.
     
    The housing policies and ignorant speeches of the President are making the Secretary look like “a fool.”  The President has promised that tens of millions of home owners would be helped by his policies yet statistically it is less than one million and not all of those are guaranteed to be successful.
     
    Even though this President can speak well, his actions look like those of the stammering.  He apparently does not listen to his housing advisors or they are worthless.  Either way his housing policies are NOT working?  Moody’s may claim housing values will be rising next year but what good are their projections?  Look at the Moody’s rating of mortgages in the past and that should indicate how strong they are in evaluating the situation in housing.  
     
    The situation today reminds one of the ineptitude of the Carter Administration gone wild.  I just wish the President had not gotten into the situation where he is living proof that the Peter Principle is alive and still working as well as when it was first promoted.

  • Alright there are more than a few really smart folks that follow this site- why can’t the HECM be separated from the forward program and add to and utilize its own MMI.  I don’t know, wondering if its been discussed.

    • wealthone,

      Let us say that in HERA, HUD was directed to create a HECM Fund rather than creating a separate categoy within the MMI Fund. 

      First let us look at the fiscal year ended September 30, 2010, in which there was an actual transfer from the MMI capital reserve fund to the HECM portion of that fund of over $1.7 billion.  If the HECM program were in its own fund, where would that allocated transfer come from?  The only other source would have been an appropriation from Congress and the likelihood of that happening is so remote, to go on is a waste of time.  The only thing that could have been done is for HUD to sharply decrease the PLFs and increase the annual MIP rate.

      Again last fiscal year over $500 million was transferred from that same capital reserve fund to the HECM portion of the MMI Fund.  Again if the HECM fund were in its own fund, Congress would have done nothing, PLFs would have gone still lower and the MIP rate would have gone higher.

      Assuming the HECM program was in its own fund, it is not clear if the adjustment during fiscal year 2010 or 2011 would have effectively shut down the program but one or the other would have done it. What is clear is that by being in the MMI Fund we received what effectively amounted to an over $2.2 billion total in appropriations over the prior two fiscal years so that the HECM program could survive in its current state. As an industry we are living off of monies which were set aside for forward programs.  So please tell us how we would have survived in our own fund? 

      All of the information discussed in this comment has been vetted on this site starting in the spring of 2009.  It was also fully disclosed by HUD in its actuarial reports on the HECM program in the MMI Fund for both fiscal years 2010 and 2011.  This is why it is so important not to ignore reading the annual actuarial reports on the HECM program within the MMI Fund.

      This is not a matter of being smart. It is simply a matter of being somewhat current.

  • Wealthone,
    First, let me say that I am in agreement with your thought. Bear in mind that the HECM program represents a very small part of HUD/FHA. Those of you who have read my posts in the past are aware that I am a proponent of separating the reverse mortgage industry from the forward mortgage industry and feel the need for separate education and licensing for their participants. it is up to us in this industry to educate those around us and our legislators if we would ever want this to come to fruition.

    • Mr. Kegan,

      Please see my comment to wealthone above.  I fully disagree with you both about a separate HECM Fund.  Although several of us were upset with the move from the General Insurance Fund to the MMI Fund, it is now clear that we were wrong and without that move, the HECM program would have collapsed or be near collapse.

      I fully support the concept of separate originator requirements.  That is a totally different matter. 

      I believe all reverse mortgage (not just HECM) originators should be NMLS licensed and none should be allowed to be merely registered.  Qualification to be a reverse mortgage originator should have the additional requirement to pass a second exam similar to the CRMP exam before they can originate HECMs or other reverse mortgages.  There should be separate exam fees but no additional licensing fee.

    • wealthone,
       
      Not only is it OK to dream, but it is also one of the principal ways industries move forward.  So dream away.
       
      As New View Advisors points out in recent commentary, the condition of the MMI Fund is only part of the story.  To understand the whole HECM story one has to look at the HECM portion of the HUD General Insurance Fund which reflects the projected financial results for the majority of the outstanding HECMs; however, as to the annual budget the condition of the HECM program in the General Fund has been more footnote in the last three fiscal years than crucial factor in the Congressional appropriations process.  [The projected financial results of HECMs endorsed after September 30, 2008 are reflected in the MMI Fund, while the projected financial results of HECMs endorsed before October 1, 2008 are reflected in the General Insurance Fund.] 
       
      The New View commentary is important not because their methodology is exacting or their approach is better but because such perspective brings a different “view” to bear on the condition of the HECM program.  While their approach is perhaps overly pessimistic (and to some over the top), it is nonetheless in the range of realistic possibilities and thus deserves at least limited consideration.  The picture would be much more positive if the housing situation were better (especially in states like California, Florida, and Texas) than it is currently. 
       
      It would be great if what was said about the HECM program back in 2004 were still true:  The HECM program is a self -sustaining program.  But this is a different time.  We are still in the middle of the Great Housing Depression with the end not yet clearly in sight.

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