HUD Between a Rock and A Reverse Mortgage Hard Place

Even before an independent audit of the Federal Housing Administration’s financial position revealed the agency did not have enough net worth to pay off the balance of its outstanding insurance claims, its leaders said change was on the way for its Home Equity Conversion Mortgage program.

To address the near 70% proportion of full-draw fixed rate reverse mortgage borrowers in today’s market and the related issue of borrowers going into default due to failure to pay tax and insurance on their properties, HUD officials told the industry in October that change was on the horizon.

Now, with FHA’s reverse mortgage portfolio accounting for $2.8 billion in negative net worth based on assumptions surround the current lending environment, the agency is facing scrutiny of Congress and has asked for more authority to manage the reverse mortgage program in particular.

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That change is coming and will be here soon, says former FHA commissioner and current Mortgage Bankers Association President David Stevens.

“If you read the actuarial report, there’s no scenario in which that program is self sustaining,” Stevens told RMD in an interview.

The HECM portion of the Mutual Mortgage Insurance fund was shown to be $2.8 billion short of paying off all outstanding insurance obligations, should they all come at once. Congress mandates the fund to maintain a capital ratio of 2%. 

The prominence of the fixed rate product with very little viable market for the adjustable rate HECM, combined with market factors including the low interest rate environment and lagging home price recovery has led to a significant impact on the part of the reverse mortgage program in particular, Stevens says.

“That leaves HUD with the proverbial challenge of being stuck between a rock and a hard place,” he says. “They recognize the important role reverse mortgages play for seniors. They are virtually the sole provider of the program for those who have to use it. At the same time, they operate a business that by law under statute has to maintain a positive capital reserve in the fund. This means the HECM program has to be sustainable from a fiscal and fiduciary standpoint.”

While fixes to the forward insurance fund are implemented relatively easily, bringing the reverse mortgage insurance fund into the black takes more time and calculation, and in this case, could require the help of Congress.

Potential changes that have been discussed include restricting the uses of the fixed rate reverse mortgage product, reducing principal limit factors to make less available in terms of borrower proceeds, or to the extreme, eliminating the fixed rate product in favor of the HECM Saver, Stevens says.

A major concern lies in how “far” FHA must go to ensure the program is sustainable without ruling out too many borrowers or further damaging the fund by reducing volume.

“There is no question that if these initiatives are enacted, HUD will retain greater authority to protect the MMI Fund,” wrote K&L Gates attorney Phillip Schulman following the FHA’s audit, noting HECM program changes as one of the initiatives. “Clearly, a worthwhile goal. But at what cost?”

Industry advocates are working closely with HUD and FHA toward swift and sensible changes, in preparation for a Congressional hearing in early December during which the FHA audit is expected to be a topic of discussion.

“We are consulting with HUD to give them a chance to determine what their preferences are and we are going to be supportive of any effort they might make,” says Peter Bell, National Reverse Mortgage Lenders Association president and CEO.

The industry has been in close communication with HUD leadership, which has been vocal about program changes for several months, and most recently through a presentation by Deputy Assistant Secretary Charles Coulter during NRMLA’s annual convention in October.

“The team in place there are very much hands on and are involved in HECM in a way the top officials have not been in recent years,” Bell says. “They are really giving it the time and attention to think it through.”

This attention is even more necessary given the sweeping changes that could be seen barring authority granted by Congress for FHA to make more calculated alterations to the program. That change, in whatever form, becomes a necessity for a sustainable program.

“The only way you can unfortunately protect the overall reverse mortgage program during low home value appreciation and low interest rates is to intervene and take steps that some may think are more drastic than business and the consumer require,” Stevens says. “But they may be the only option.”

Written by Elizabeth Ecker

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  • These changes will obviously lower overall HECM volumes, and without a non-FHA product to fill the void, reduce the number of those employed in the RM industry. 

  • Quite a bit of very smart folks are working on this, but hoping they don’t act in knee jerk response.  That hybrid fixed rate platform could really make an impact on the program and combined with no further depreciation in home values- we may be able to sustain without too much of a PL factor decrease or MIP increase.  Fingers crossed.

  • I mentioned it in another post, but I really hope they’ll consider lowering the floor again before doing something drastic.  If fixed rate HECMs  (or hybrids with a significant draw) are originated at 4% to get the max PLF, the risk to the insurance fund will be reduced.  I don’t know if it would be enough, but it could be part of an overall solution.

    • How does lowering the floor help anyone?  What is generally meant by lowering the floor is increasing PLFs at the floor.  So please explain what you mean.  I would not support such a concept if PLFs increased at the floor.  Are you saying keep the current PLF table intact except lower the expected interest rate by 1% on all PLFs?

      With the current MIP rate, a 4% expected interest rate is about the same as a floor of 4.75% before October 1, 2009 when it comes to the “growth” in the balance due.  With the huge potential losses bleeding from the endorsements for fiscal year 2009, the equivalent to 4.75% seems more optimism than realistic assessment.

      Why not just end fixed rate Standards now with the implementation of a hybrid Standard HECM before July 1, 2014?  Yes, there would no doubt be a lot of refinancing on July 1, 2014 but what else can be done?

      • I’m not advocating for increasing PLFs at this time for any expected interest rate.  I’m suggesting that the only way one can obtain the max PLF is if their expected interest rate is 4% or lower.  The PLF is reduced at rates of 4.01% and higher.  Something similar happened not that long ago when the floor went from 5.56% to 5.06%.  It was during the MIP increase of .5% to 1.25%.  

        This solution would benefit FHA, the consumer, and still leave the volume necessary for most lenders/brokers to survive.  If FHA does something much more drastic, this industry is going to be hanging on by a thread.  

  • Fixed rate days are a numbered.

    How will this effect your compensation?
    How much does your employer rely on the fixed rate to stay afloat?
    Do you believe you can survive selling adjustable rate loans only?
    Does your employer have their Ginnie?

    There is no way to spin this one.  

    My guess is companies will rethink if they want to remian comitted overnight and only the strong will survive.

    Get your resume’s beefed up over the holidays!

  • I wonder if we are looking at rolling back to the old days and eliminating the fixed rate product entirely? Or will the HECM fixed disappear and possibly a new proprietary fixed rate product will pop up in the market place?

    Matt Neumeyer brings up a good point and that is lowering the floor again. As Matt brings up, If the fixed rate
    HECMs were originated at 4% to get
    the max PLF, the risk to the insurance fund would be be reduced.It could be part of part of the solution?

    We have a lot of questions lurking around the corner and what if”s. If we never had a fixed in the first place, if we never had live pricing, if we had more insight into the housing price crash, what if.

    There is no easy solution to this problem but I say this, we must be methodical and prudent in what ever we do. The reverse mortgage is to valuable of a retirement vehicle to the senior sector. We can’t make it so difficult for them to get a loan that will work for them. So regulators, be smart, don’t jump to quickly in to a hot pot of boiling water. Think this one out and call on experts in the RM industry to help!

    John A. Smaldone

    • John,

      There are two things we must address.  First HUD has created a social welfare program out of the HECM program.  It favors those with homes over those without.  FHA should not be in that business.  While that side of the business was great and gave off a tremendous sense of worth to originators, it also resulted in a social welfare program not granted by Congress.  It is part of the drug effect of OPM (Other People’s Money).

      This program should not be the social welfare program it has evolved into.  It should provide help to those who can utilize it without doing harm to it.  The program overseer has allowed us to help the most needy who have also generated some of the largest revenues for lenders based on taking fixed rate Standard HECMs and put American taxpayers in the greatest jeopardy.  We have also generated fixed rate Standard HECMs when it is clear that the senior does not need a significant portion of the Principal Limit at closing.

      While I do not agree with her often, here is one place where Senator McCaskill was absolutely right.  Our reverse mortgage program has been used perversely, putting American taxpayers at risk just to help out seniors who are unjustifiably (from a financial standpoint) trying to hang onto their homes.  The present structure of the program has put FHA and the American taxpayer at risk for over $5 billion.

      Should the program be terminated?  Absolutely not.  Should it be restructured and cut off the most needy?  By and large the answer is yes.  Should the fixed rate Standard be eliminated? Absolutely but some kind of hybrid should replace it in the next two years.  Should we keep the fixed rate Saver?  For now the answer seems yes.

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