WSJ: Reverse Mortgage Program Losses Are New Drain on Economy

The Federal Housing Administration’s reverse mortgage program is one example of the burden FHA is presenting to the U.S. economy, writes the Wall Street Journal in a column this week. The losses, outlined in a November actuarial review of the agency’s insurance fund, stem from a downturn in home prices and miscalculations on FHA’s part, the column asserts. 

WSJ writes: 

Spare a thought for Shaun Donovan, who must be tired of crafting nuanced explanations of how his agency costs taxpayers billions of dollars. The latest example came this month when the Housing and Urban Development Secretary told the Senate that the Federal Housing Administration’s once-modest reverse-mortgage program is the latest drain on taxpayers thanks to gross mismanagement.

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Or as Mr. Donovan delicately put it to Tennessee Senator Bob Corker, the FHA’s reverse-mortgage business is an “important” issue that the agency needs “to make changes on.” You don’t say.

HUD’s independent actuary estimated last month that the FHA will lose $2.8 billion this fiscal year on reverse mortgages, and in the worst case $28.3 billion, with the losses stretching through 2019. The feds have no idea how big the pool of red ink might be.

For those who haven’t seen former Senator Fred Thompson’s TV ads, reverse mortgages are a type of home-equity loan for Americans age 62 and older who have mostly or fully paid off their mortgage. If the borrower can pay real-estate taxes, insurance and other fees, he can borrow against the home and stay in it until death. Then the lender demands repayment with interest.

The problem is that taxpayers, via the FHA, insure lenders against the funds they advance plus accrued interest, and borrowers can also borrow to pay the fees. FHA did fewer than 50,000 reverse-mortgage deals a year until 2006, when the housing mania went galactic. By 2007, the agency was insuring more than 100,000 reverse mortgages, and by 2009 the average FHA-backed reverse mortgage reached $262,763, often paid in a lump sum….

Read the full article at WSJ.com.

Written by Elizabeth Ecker

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  • What assumptions are being used to reach $28 billion in losses?  While that number may be a possible result, is it reasonable, plausible, or even probable?  There are less than 600,000 active HECMs.  To get to a $28 billion loss would mean very HECM had an average loss of about $47,000.  

    The fewer the number of HECMs underwater, the higher this average must go on a per a HECM in loss position basis.

  • Huh?  The last time I checked FHA is self funded and has yet to take any taxpayer dollars from the Treasury. This hearing was in anticipation that FHA may need to request Treasury money to shore up the fund as a result of this report.  These projections are based on the assumption that the FHA will not collect one more dollar in revenue, which clearly is not the case. It is a shock to that the FHA was on affected by the housing downturn? That the fund will need time to recover?  Last time I checked the Treasury had no issues with writing $700B bailout to the big banks, and have reported a $17.7 B profit from the sale of some of those assets.  Shameful 🙁

  • $2.8 billion loss this year?  I thought that is an estimate of future losses over the lives of the loans, though from an accounting perspective that loss needs to be recognized now.  If I’m correct, then some of that loss could actually turn to a gain in future years if the assumptions were incorrect. 

    That’s basic GAAP accounting for loss estimates.

    Although $2.8 billion is still a large number, it puts a different spin on things. 

    • Mr. Jackson,

      As a CPA yourself, you know that annually estimated losses on outstanding loans must be updated.  We do not have a $2.8 billion increase in the NET loss estimate for HECMs in the MMI Fund this year but rather a $4.1 billion increase in the HECM NET loss bucket this year.  The math verification of this number is the difference in the “equity” of the HECM portion of the MMI Fund from last year to this.

      The assets in excess of liabilities and discounted net loss estimates for last fiscal year was a positive $1.3 billion in just the MMI Fund (not including the GI Fund).  This year that (equity) cumulative figure is a negative $2.8 billion.  That is a net $4.1 billion change in the HECM equity position within the MMI Fund.

      If you look at the actuarial report, the size of the increased loss for the business done from October 1, 2009 to September 30, 2011 is enormous.  Then tack on the loss for the business done last fiscal year and suddenly you are at a net over all reduction in HECM MMI Fund equity of over $4 billion.

      Now consider that to get to a $1.3 billion positive position, HUD took over $2.2 billion from other funds and that to be in line with legal requirements the “equity” should not be just zero but a positive 2% reserve and you begin to understand why there is all of this concern.

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