HUD: Reverse Mortgage Count Falling, but Program Generating Cash Flow

In its latest quarterly report to Congress, the Department of Housing and Urban Development indicates its Home Equity Conversion Mortgage program is generating positive cash flow.

Following an annual audit and report to Congress in the fall that showed a shortfall in the reverse mortgage program that could lead to a first-ever Treasury bailout of the Federal Housing Administration, the quarterly report for Q1 2013 shows a negative subsidy rate for the HECM program of -0.92 percent. While the subsidy rate is negative, this means the program is generating positive cash flow at that rate.

The reverse subsidy rate compares with the forward portfolio, which currently carries a subsidy rate of -5.98 percent.

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In the first quarter of fiscal year 2013, HUD counted 12,079 reverse mortgages, down 4% from the previous quarter and down a single percentage point year-over-year.

“The credit subsidy rate for HECM loans declined (in absolute value) to -0.92 from -1.52 percent as a result of predictions of lower long-term house price increases and greater shares of borrowers taking full draws against their principal limits at time of loan origination,” HUD stated in its report. “It is
important to note the volume of HECM loans continued to decline in FY 2013 Q1. The quarterly volume of $2.7 billion was five percent below the previous quarter’s volume and almost 20 percent below the year-earlier volume of $3.3 billion

Written by Elizabeth Ecker

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  • The HECM program is not shrinking. The growth rate of endorsements is still in decline.

    For the program to shrink, the number of terminations would have to exceed the number of endorsements. What is happening today is that the number of active HECMs is still growing which means endorsements are still exceeding terminations.

    Despite what some say, the MMI Fund will soon be in much better shape with a shrinking active fixed rate Standard base than with a growing one. Yes, ARMs can be full draw but a significant percentage are NOT. Also ARMs are currently far less of an accrued interest rate problem than fixed rate Standards.

    With full draw ARMs, if HECM note interest rates on those HECMs suddenly spike, that simply means the sooner those ARMs go into assignment where high interest rates have relatively little impact. In assignment HUD as the note owner is earning the accruing interest. So where is the potential loss to HUD from that source?

    The opinion expressed in this comment is not necessarily that of RMS or its affiliates.

    • @Mr. Veale

      As someone with less experience in this arena than you have, I am always sure to read what you have to say when you comment in these group discussions. I sincerely appreciate your insight, which helps to broaden my perspective.

    • HI James,
      I appreciate your perspective and have adapted the language not to describe a shrinking program, but lower endorsement volume. Thank you.
      liz

  • Hey Atare,

    The gloom should be much greater than it has been with Secretary Donovan recently announcing in Congress that the negative net position of the HECM portion of the MMI Fund will reach over $5.2 billion at fiscal 2013 year end. That is an increase of over $2.4 billion. With over $2.2 billion transferred from other MMI programs into the MMI Fund during fiscal years 2010 and 2011, the HECM program will be over $7.4 billion short of being self-sustaining by fiscal year end per Secretary Donovan.

    Now we come to the codified requirement that the MMI Fund equal to at least 2% of the outstanding insurance in force and that will require about another $2 billion in positive net position for the HECM portion of the MMI Fund by fiscal year end according to actuarial estimates.

    So for the HECM portion of the MMI fund to be in compliance with the law and at the same time to be self-sustaining, the HECM fund is projected by HUD to about $9.4 billion short of that objective.

    While home appreciation will help, there is no guaranty we will see much help in the HECMs which are producing these awful losses before such loans terminate. It will take decades of excess insurance premiums to make up for these losses, if home appreciation does not take care of them before the related HECMs terminate. The clock is ticking.

    (The opinions expressed may not be those of Reverse Mortgage Solutions or its affiliates.)

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