FHA: Stabilizing Reverse Mortgage Program is Crucial

Amid growing concerns that the Federal Housing Administration (FHA) could require a taxpayer-funded bailout, Commissioner Carol Galante answered to House Republicans today on the agency’s negative economic position.

Stabilizing the agency’s Home Equity Conversion Mortgage (HECM) program is an “important mission objective” for FHA, Galante said during today’s hearing before the House Financial Services Committee, pointing to changes that have already taken place for reverse mortgages.

Galante acknowledged the program represents 17% of FHA’s mortgage insurance portfolio’s economic loss, but pointed out that the agency has already enacted significant changes, specifically a moratorium on its fixed-rate standard product set to take effect April 1. The change is in response to an actuarial report published in November 2012 revealing the reverse mortgage program stands at a negative net worth of $2.8 billion.


“FHA will take immediate action to better align the program with its objective of enabling seniors to age-in-place,” said Galante. “These changes will protect FHA from losses and reduce the likelihood of borrower defaults due to nonpayment of property taxes and insurance.”

The agency’s 56% share of the mortgage market in terms of loan endorsements, along with its insurance portfolio valued at a negative $16.3 billion, has stirred anxieties among the House Committee, fearing a bailout might be around the corner.

Another central step toward improving FHA’s negatively valued insurance fund was raising insurance premiums on its forward mortgage business 10 basis points as well as several other risk management procedures, Galante stressed during the hearing in response to calls for reform.

During a hearing last week, Committee Chairman Jeb Hensarling called FHA “flat broke,” and claimed the agency is at risk of becoming the next Countrywide given its credit score policies and high default rates.

“For us to have a healthy economy, we must put the nation on a sustainable fiscal path,” said Hensarling at today’s hearing. “And to have a sustainable fiscal path, we must also have a sustainable housing finance system. I have grave fears that FHA, as it is operating today, is an impediment to both.”

The Committee even accused FHA of straying away from its original mission of assisting lower- and moderate-income borrowers, as it provides high limit loans of over $700,000.

The FHA remains true to its mission of assisting lower wealth borrowers, Galante countered, as those who qualify for high-limit of loans only represent 0.5% of FHA’s business.

Without FHA, home prices would have dropped an additional 25% and the nation would have lost nearly 3 million jobs, according to analysis by Moody’s Analytics that was brought up several times throughout the hearing.

“FHA must continue to be a reliable steward of taxpayer dollars and also remain a key source of access to homeownership for the families of today and for future generations,” said Galante.

Written by Jason Oliva

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  • The hearing makes it absolutely clear that the report of the auditors has nothing to do with the concern of Congress. It is 100% focused on the fiscal year 2012 report of the actuaries which is of very grave concern.

    It is sad how many of the arguments in this industry are not only ignorant but generally mindless when it comes to FHA problems. If we expect to be heard, we at least need to get our facts correct.

    It is doubtful if many in the industry have read the actuarial report. Some of the arguments by those who have at least read it leave something to be desired. The actuaries are not saying that the HECM portion of the MMI Fund will turn around in this decade. What they do say is that based on FHA estimates of future endorsements, the net loss position will be about $426,000 million in the read by the end of fiscal 2019. Such predictions are dubious at best.

    For example, some claim housing is turning around and will soon be recovered. Yet housing nationally is 22% below its value peak and most responsible leaders in that field are saying we should see that overcome in three to four years. By that time, most of the endorsements in our peak years will have terminated. While the majority of the HECMs endorsed during fiscal 2009 (the first HECMs reflected in the MMI Fund) should still be active, a very significant minority should have terminated. BUT current trends do not look at T & I foreclosures. So how many of these foreclosures are related to fixed rate HECMs endorsed after fiscal 2008 and how many of those will end up with positive equity?

    But is it enough for home values to simply recover? Absolutely not. The HECM formula depends on homes appreciating at a little less than 4% compounded annually. So if the home value recovers in 2017 on a HECM originated in fiscal 2009, it is still behind where the value needs to be for FHA purposes by about 36%. So when and how will the value on that 36% be recovered? Let us say the recovery on the 2009 home value only needs until 2014 to fully recover. That still means the home value is short by about 21% of where it needs to be in the HECM framework.

    Are the predictions made by HUD in the actuarial report reasonable? First it needs to be said they are about 6 months old. For this fiscal year the endorsement prediction is for over 65,500 endorsements. Yet look where we are after the first four months of this fiscal year at just 17,282 which is a pace slower than last fiscal year and that does not take into account the loss of the fixed rate Standard after 3/31/2013. So is it hard to believe that the net loss position of the HECM portion of the MMI Fund will improve slightly by the end of the next fiscal year as the actuaries predicted in their 2012 fiscal year report? You decide.

  • Representative Neugebauer said it well when discussing the message from HUD over the last four years and the responsibility of the Committee for oversight of HUD. He stated every year for the last four years the Committee was told how much better HUD was doing and how things would turn around in the next fiscal year. Yet just look at the actuarial report they received for the last fiscal year.

    It said it reminded him of the patient who got a call from his doctor with both good news and bad news. The doctor said the good news was that he had misinterpreted the results of the tests the patient took some months ago and he now recognized that the tests showed the disease was actually terminal and the patient only had six months to live. The patient asked if that was the good news what was the bad news? To that the doctor replied that he should have called the patient with that news six months before.

    It is legitimate to want the HECM program to become a social welfare program but right now it is not, nor is there sufficient support in Congress for it to become such. So until such time as the HECM program reaches social welfare status it must return to self-sustaining status soon.

    It is how to return to a self-sustaining program which is of issue. Perhaps it cannot for years but somehow, someway, HUD needs to do more than simply be satisfied with a so called moratorium on HECMs and implement some financial assessment procedures and misconceived mandatory set asides of taxes and insurance for all borrowers.

    Our industry may be in for a rough ride until the end of the decade. Even then there is no guaranty things will have fully turned around.

  • If you have any interest in the industry and the problems FHA is facing, this three hour interaction between the Commissioner and members of Congress is very enlightening and worthwhile.

    While the session mainly deals with the net loss position of the total MMI Fund, it also sheds some light on why a 9.8% serious default rate is not unusual for FHA programs. When answering, the FHA Commissioner turned the issue on its head stating that this means that over 90% do not go seriously into default. .

    Commissioner Gallante does a superb job in presenting her case as do those who question FHA accounting and the extent of the actual net loss position in the MMI Fund. Some of the information resulted in personal changes in my view on the issues. You can find it at:


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