New Analysis: Did FHA’s Reverse Mortgage Audit Go Too Far?

The independent audit of the Federal Housing Administration’s financial health found a negative net worth of more than $16 billion, but some say the report might have been overly negative in its projections.

The agency’s Home Equity Conversion Mortgage program contributed to negative $2.8 billion of the problem, and the report suggests it will take a few years until it turns positive. Using different assumptions, however, analysis shows the HECM program could already be contributing positively.

The audit’s findings will direct change across FHA’s housing programs including its reverse mortgage program, the agency wrote in a report to Congress upon the audit’s release. But analysts say the audit may have gone too far it its projections, and thus, program changes currently under discussion may be too strong in response.

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“We can’t know for certain without looking at their model but the two main points we want to make are one, that the product as currently structured is not contributing to the problem,” says Joe Kelly, partner with financial services firm New View Advisors, which recently published detailed analysis on the report and its conclusions. “The other point we want to make is that HECM has already cut back its loan to value ratio based on principal limits. But the forward product hasn’t. We do not believe the HECM program is contributing disproportionately  to FHA’s projected deficits/losses.”

In the analysis published on New View’s website, Kelly and his colleagues respond to the audit’s findings, noting that while appropriately conservative in some of its estimates, the review may go too far in some of its conclusions.

Based on very rough calculations without actually recreating the audit’s modeling, Kelly estimates the HECM portion of the MMI fund may be more realistically valued at positive $.6 billion rather than the negative $2.8 billion the report found, accounting for fewer future losses than assumed in the official review and New View’s estimate of ongoing insurance premiums collected for the HECM portfolio.

The analysis weighs strongly in a discussion of potential changes to the program, having led FHA to ask Congress for more authority in managing the Home Equity Conversion Mortgage program accordingly. If that authority is not granted, it will mean sweeping changes for the product, MBA President Dave Stevens stressed to RMD last week.

“We’re hoping there are not ‘root canal’ changes to the product that are not necessary,” Kelly says.

FHA leadership agrees the older vintages in its overall portfolio are the source of the problem and that recent changes are already protecting the current books of business.

“Since 2010, we significantly increased the revenue coming in to cover the projected losses,” FHA acting commissioner Carol Galante told attendees of a housing summit hosted by the Center for American Progress last week. “The credit quality of the credit losses is projected to go down significantly. So what you have is a positive economic value in new books of business and we are dealing with the hangover of prior years’ books of business.”

Yet the administration already has announced changes to its forward program and says it will have HECM changes in order pending additional authority granted from Congress to manage the reverse mortgage program. The question remains whether the basis for those changes was too far reaching.

“In some cases they were appropriately more conservative [in the audit],” Kelly says. “We’re not saying it’s all wrong. In some cases they made appropriate adjustments. We just have some questions about whether they go too far.”

View the New View Advisors analysis.

Written by Elizabeth Ecker

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  • The article mixes up audit reports with actuarial reports.  They are not the same.

    The job of the actuary is to provide comfort as to the computation of the present value of the projected cash flow generated by the HECMs which were active as year end.  Auditors confirm that the financial statements are in conformity with GAAP.  Auditors generally rely on the work of the actuaries.

    However, I respectfully disagree with the notion that there are only appropriate and overly negative estimates; there are overly optimistic estimates as well.  For instance, projected endorsements are as usual overestimated.  The actuarial field work is completed annually before the endorsement year ends.  Thus for fiscal 2012, the total endorsements shown on Page 10 of the report is 57,519 rather than 54,822.  

    The endorsements for fiscal 2013 shows 65,533 which has little root in reality.  That is 14% higher than the estimate shown in the report for fiscal 2012 and almost 20% above actual for last fiscal year.  So far this fiscal year endorsements are already over 12% lower than for the same period last fiscal year.  The case number assignments are over 7% less through the four months ended 9/30/2012 than they were for the prior fiscal year again pointing to lower endorsements for the first four months of this fiscal year.

    It is very easy to show positive contributions coming from the HECM portion of the MMI fund.  For example just assume that home values will grow nationally now and in the future at 49%.  Of course that is ridiculous.  Playing around with assumptions will produce the desired effect but HUD has a job to protect taxpayers as well.

    As to the PLFs being cut back, that was not true with the floor on 10/4/2010 which actually saw PLFs go up for most borrowers and since the overwhelming majority of HECMs have been closed with expected interest rates at or below the floor, there has been little to no significant reduction in PLs for fixed rate HECMs since the change in PLFs since 10/3/2010..

    Is an ending balance of even $600 million adequate?  Remember whether the ending balance is a negative $2.8 billion or a positive $600 million over $2.2 billion in appropriations from other programs in fiscal 2010 and 2011 are in those numbers.  So is a positive $600 million self-sustaining?  Hardly!!!

  • Estimations of future loan losses must be based on assumptions, of course.  It’s prudent to use conservative assumptions to estimate loan losses (especially now), which appears to be what they’ve done.  Questioning the validity of the assumptions used has no useful purpose at this point, too late for that.   

  •  New View Advisors told them 3 yrs ago to install T&I set-aside or escrow.

    Can it be
    that after 70 yrs on earth seniors actually forget or refuse to pay taxes and
    Insurance.

    If they
    are not able to pay for taxes and Insurance then they would not even be able to
    afford RENT. No the problem is simple they can`t manage their budget and need
    to do it monthly the way they did it their entire life.

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