Housing Expert to Congress: Reverse Mortgage Changes On Right Track

The home equity conversion mortgage (HECM) program has seen monumental changes over the past few years, but these changes are leading the reverse mortgage down the right track, one housing leader told members of Congress on Thursday.

“As a result of these changes, the independent actuary projects that the next five years of reverse mortgage originations will be profitable for FHA, which will reduce the shortfall FHA faces on this business line,” said Julia Gordon, director of housing and consumer finance for the nonpartisan think tank Center for American Progress.

Gordon’s remarks were prepared in written testimony for the second in a series of congressional hearings to examine the financial status of the Federal Housing Administration (FHA) and the health of the Mutual Mortgage Insurance (MMI) Fund.

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In the first of this series of congressional hearings, Department of Housing and Urban Development (HUD) Secretary Julián Castro was pressed by congressmen to answer questions relating to reverse mortgage co-ops and the impact of the Reverse Mortgage Stabilization Act, among broader topics relating to the FHA.

While Castro said he would follow up with Congresswoman Carolyn B. Maloney (D-NY) regarding her question about co-ops, he told Rep. Denny Heck (D-WA) that the Act would help stabilize the reverse mortgage program.

The HECM program, he noted, has been a challenging part of the FHA’s portfolio of loans, whose financial footing remains in negative territory following the agency’s annual actuarial review.

Despite having experienced some challenges in the past, the revamped reverse mortgage program shows promise in protecting both the FHA and consumers.

“FHA has made important changes to its reverse mortgage program, limiting both the upfront and overall equity that is available to borrowers, requiring that these lenders assess a borrower’s ability to pay taxes, insurance, and other property expenses or escrow for these funds for the borrower, and requiring customers to obtain housing counseling before obtaining a reverse mortgage,” Gordon noted in her written testimony.

Still, she wrote, HUD needs to provide “meaningful protection” for non-borrowing spouses — an issue that has long plagued the reverse mortgage industry, and on which HUD has recently issued more guidance.

While Gordon’s written testimony zeroed in on the upsides and downsides of reverse mortgages, the topic was not discussed during Thursday’s two-hour-long hearing.

Instead, members of the Housing and Insurance Subcommittee pressed housing experts on topics including counseling, the recent forward mortgage insurance premium (MIP) cuts and the MMI Fund’s 2% capital cushion.

Following the conclusion of the hearing, the FHA released a statement on its commitment to provide homeownership for the middle class, referencing the MMI Fund’s $21 billion improvement over the last two years and the benefits of its recent premium reductions.

“We believe it’s time to reduce our prices to make it possible for nearly quarter of a million credit-worthy families to purchase their first home in the next three years,” writes Acting FHA Commissioner Biniam Gebre.

Perhaps responding to some of the experts’ criticisms of the MIP cuts, Gebre noted that critics claim the reductions are a return to the days of subprime lending when loans were approved for borrowers who had no business buying a home.

“Let me be clear – FHA has never, is not, and will never engage in the sorts of lending practices that triggered the housing crisis. Unless one is trying to make a distinction, using the words ‘subprime’ and ‘FHA’ in the same sentence is not factual,” Gebre writes. “The borrowers that FHA serves are not subprime. They are in fact the prime example of families pursuing the American dream.”

Written by Emily Study

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  • The history of the reliability of the projections made by the independent actuaries has been poor. Part of the problem has been changes in assumptions and the general unpredictability of the housing market since October 1, 2008.

    As to Congress, FHA Commissioners have taken the situation from bad to worse when testifying before Congress due to their unfamiliarity with the HECM program. The last FHA Commissioner with a reasonably good understanding of the program was Commissioner Montgomery but his service in this position only extended into the first four months after the first endorsed HECM was accounted for in the MMI Fund in October 2008. So there is no history to show how the MMI Fund would have fared under his stewardship.

    In December 2013, Commission Galante presented a report to Congress that showed that the then current fiscal year (ended 9/30/2014) would end in a surplus of a little less than $1 billion but instead ended up in an over $7.7 billion loss. So if FHA was that far off when the fiscal year end was less than 10 months away, what reliance can Congress place in the testimony of FHA Commissioners when it comes to how the HECM portion of the MMI Fund will perform.

    To a significant degree it is more important for the MMI Fund to do well this fiscal year than for endorsement numbers to grow.

    Some incorrectly believe that huge endorsement numbers will produce so much MIP that losses will be wiped out but unfortunately that simply is not the case. If the projection for a cohort of HECMs is a loss that loss means the loss exceeds all MIP plus any earnings on that MIP, so that the greater the cohort, the greater the projected loss. Each year all HECMs still active in the MMI Fund are reevaluated by the actuaries to see based on current information if the projected profit or loss on those HECMs should be adjusted up or down. Last fiscal year there was a substantial change for prior HECMs still active in the MMI Fund.

    So while it is great to have support from housing experts about a positive future of the HECM program, it is not very meaningful if the loss in the HECM portion of the MMI Fund at the end of this fiscal year goes higher. But if the results are a further loss to the MMI Fund, it is important that fHA gets out in front of it to mute the effect of that loss.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

    • James,

      And where was Commissioner Galante by the end of fiscal year 2014? About 45 days before September 30th she had announced her departure from HUD. The HECM loss you reference was the worst fiscal year loss on record.

      Let us hope that the September 30th of last year changes were sufficient to make things right or Congress could take matters into their own hands and make it tough on all of us.

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