Barring Another Housing Catastrophe, HECM Portfolio To Improve Each Year

Nearly 20% of the Federal Housing Administration’s Home Equity Conversion Mortgage loans outstanding have a greater loan balance than the property is worth, but the worst may be over for FHA’s “underwater problem,” recent commentary published by New View Advisors states.

Having stated in a recent piece of commentary that FHA’s outlook was “still too rosy” when it reported in November on the state of its Mutual Mortgage Insurance (MMI) fund, today, New View says that despite having an economic value of -$5.4 billion, the HECM program stands to gain, as long as the housing market sees a rebound.

“Barring another housing catastrophe, the worst may be over,” the analysis states. “If so, the current position of the HECM will improve each year, as FHA’s HECM risk profile reflects an increasing percentage of the new, more conservative standard HECM loans and HECM Savers.”

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The estimated negative value of the HECM portfolio can be attributed in large part to HECM loans originated from 2005 to 2008, New View says. And because of those loans paying off over time, the numbers will get worse before they get better.

However, several months of new loan production of improved HECM products indicate that the MMI fund has avoided the deterioration that could have occurred, New View writes. “Combining FHA’s estimates of what will happen with our estimates of what has happened, the program’s net economic value since inception now stands at about -$5.4 billion. We think that FHA’s current projections are a bit optimistic, but even using their old numbers, the program’s economic value held steady.”

Read the New View Advisors commentary in full, with detailed calculations.

Written by Elizabeth Ecker

 

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  • The New View article is far less informative than desired.  Here is its summary of HECM program results:

    $5.3 Billion

     

    MIP
    collected

    -$0.7
    Billion

     

    Realized
    losses

    -$7.9
    Billion

     

    1990-2008
    originations: projected net loss

    -$2.1
    Billion

     

    2009-2011
    originations: projected net loss

    -$5.4
    Billion

     

    HECM program
    Net Present Value 1990-2011

     

    It would be far more informative if this schedule had three
    columns.  The first would be the financial
    information on those HECMs endorsed (not originated) from inception through September
    30, 2008.  The second would reflect the
    information for HECMs endorsed after September 30, 2008, and the final column
    would reflect the total of the other two columns.  The row categories should be MIP collected,
    realized losses, gross projected MIP, gross projected losses, allocations from
    other sources, and then totals. 

     

    The first column would match the financial information
    contained in the HECM portion of the General Insurance Fund (“GI”) and the
    second, the HECM portion of the Mutual Mortgage Insurance Fund (MMI).   That presentation
    would be far more helpful and informative.

     

    It seems not only HUD but also New View has taken a MSA
    approach rather than the less sensible national approach used in the past.  While this is more difficult, it is far more
    indicative of what is  happening to the HECM program.  

     

    The overall picture when it comes to HECMs is
    secondary.  Our main focus is and must
    remain on the HECM results reflected in MMI. 
    There is little doubt that the $700 million in realized losses were
    experienced primarily in GI.  What is not
    clear is how much of the MIP revenue relates to HECMs endorsed after September
    30, 2008.  What New View continually
    ignores is the $2.2 billion plus in capital reserve allocations which have
    been moved into the HECM portion of MMI in the prior two fiscal years. 

     

    Right now the HECM portion of MMI seems secure according to
    what not only New View is presenting but also HUD.  HUD placed the value of the HECM portion of MMI
    at around $1.3 billion at the end of the last fiscal year.  But to get there, it modified the method it
    used in evaluating the fund which resulted in about $600 million more in value
    than would have resulted if the prior method was still being employed.

     

    Although the HECM portion of GI may need financial support
    that is more of a political issue than a worrisome budgetary one.  Our endorsement production is so low that it is
    doubtful that with the higher MIP annual rate and a lower drop rate in home
    values we will see a significant positive credit subsidy amount required for
    the cohort of HECMs which will be endorsed during the fiscal year ending
    September 30, 2013.  It is hoped the
    amount may even be negative but that is the stuff of OMB and CBO scoring speculation
    not well founded estimation and projection.

     

    There is a clear headline and integrity risk with our
    continual reference to the HECM fund as self-sustaining in efforts to gain more
    support from conservative members of Congress and justifying the program to the
    press.  HECMs have not been self-sustaining
    for the last two fiscal years.  Worse it
    may become a hot political issue if New View is right and Congress has to
    underwrite several billion just to keep GI afloat due to realized HECM losses
    in the next few years. CIS and other industry spokespeople would be wise to tone down the self-sustaining justifications for HECMs.

  • Thanks for the additional information the post needs clearer information. “Although the HECM portion of GI may need financial support that is more of a political issue than a worrisome budgetary one.” I agree they are not helping the industry it just seems like they offer a program that is too late to those in need.

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