HUD Official Applauds Reverse Mortgage Industry for FHA’s ‘Solid’ Footing

The $7.9 billion climb in the economic value of the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage portfolio for Fiscal Year 2015 gave the reverse mortgage industry much to relish at this year’s annual gathering in San Francisco this week.

Overall, the FHA’s Mutual Mortgage Insurance Fund grew $19 billion, effectively surpassing its mandated 2% capital reserve ratio for the first time since 2008. This growth, which was powered by the substantial gains realized in the HECM portfolio, gave the reverse space added confidence for all of the program changes that have transpired in the past year alone.

The release of FHA’s annual Actuarial Report was well-timed with the annual National Reverse Mortgage Lenders Association (NRMLA) conference. The “good news” of the financial footing for the HECM program was met by roaring applause at nearly every session that mentioned it, and for good reason, too, as the $6.8 billion value of the HECM portfolio in FY 2015 has reinforced FHA’s trust in the reverse mortgage product and the changes it has made along the way to make the HECM a safer loan for borrowers, lenders, and the agency itself.

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“Today, we’re above the 2% capital ratio, which according to the actuarial report, FHA is sufficiently capitalized under the congressional mandate,” said Kathleen Zadareky, deputy assistant secretary for single family housing at the Department of Housing and Urban Development, during NRMLA’s keynote session Monday afternoon. “We reached this goal sooner than expected and large gains in the HECM fund are part of that.”

Climbing above the 2% capital reserve ratio, while remarkable feat for FHA and a confidence booster for the reverse industry, should not be taken for granted, Zadareky added, especially when considering the volatility of the HECM program as it pertains to the MMI Fund.

Small changes in interest rates and home price appreciation, she said, all significantly affect the outcome of the modeling, which is calculated by the actuaries who devise the annual report on the economic value of the MMI Fund.

“We will continue to look at what things we should do, and can do, to manage that volatility,” Zadareky said. “What this performance shows is that we’re moving in the right direction. We can never afford to be complacent about the Fund, but we can afford to appreciate how far we’ve come.”

This year alone, the HECM program has undergone three structural updates, including the Financial Assessment, updates to the non-borrowing spouse policy, as well as servicing and loss mitigation policies—all key programmatic changes HUD deemed necessary to make the HECM product more sustainable for borrowers, and as a result, reduce risk of losses to the MMI Fund.

“It’s critical we keep the HECM program on good, solid financial footing and that it [HECM] is used as it’s intended, and that’s where the Financial Assessment and so many of the other changes we’ve made come into play,” Zadareky said.

Harkening back to the poem “The Mighty Task is Done” by Joseph Strauss, chief engineer of the Golden Gate Bridge, Zadareky likened the feat of constructing the monumental bridge to that of the reverse mortgage industry in wake of program changes.

“As participants in the HECM program, the mighty task that we’ve all accepted is to make a difference in the lives of seniors who rely on reverse mortgages as their gateway to retirement security,” she said.

Written by Jason Oliva

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  • As a former financial auditor, it is inappropriate to be so over the top about the financial condition of the MMI Fund without looking at its composition. The balance for the HECM portion has three basic but hidden components. The next three paragraphs discuss those components. The paragraph following the three on components compares the HECM insurance program as accounted for by the MMI Fund to a private insurer. The final paragraph looks at what should be the real source of the applause.

    The first component is the amount taken from the US Treasury of $1.686 billion at the end of fiscal 2013 and has not been repaid nor has it been treated as a liability of the HECM portion of the MMI Fund. This means that of the $6.778 billion ending balance in the MMI Fund, $1.686 billion came from a direct transfer of US taxpayer receipts into the HECM portion of the MMI Fund.

    The second component is the net funds transferred into the HECM portion of the MMI Fund from other MMI Fund programs (forward mortgages) and not classified as debt to those programs netting a positive $5.776 billion. For example, in fiscal years 2010 and 2011, $1.748 billion and $0.535 billion respectively were transferred from other MMI Fund programs into the HECM portion of the MMI Fund. During fiscal 2013, the transferred amounts from those same programs totaled $4.263 billion. Then in fiscal 2014, HUD took $0.770 billion out of the HECM program placing into another HUD program. So before considering intrafund earnings, the net amounts transferred out of other HUD programs into the MMI Fund and not classified as liabilities now stands at $5.776 billion.

    The third component reflects the income, gains, expenses and losses related to HECM insurance activities. That now stands at a negative $0.684 billion which shows that as of yet, the HECM loss reimbursement portion of the HECM program accounted for in the MMI Fund (that is HECMs endorsed after September 30, 2008) is still not self sufficient.

    Now let us look at how the HECM accounting in the MMI Fund compares to a private insurer. First, senior management would have to take $1.686 billion out of the US Treasury and treat that as a capital contribution. Then there would have to be another $5.776 billion taken from government programs and again treated as capital. All program costs other than loss reimbursements (and some costs incurred in assignment) would have to be paid for by taxpayer’s monies. Finally the insurance activities of this hypothetical private insurer would show an accumulated net loss of $684 million. How would this private insurer survive? It certainly is not self sustaining.

    So should the source of our applause come from a real turn around in the financial picture of the HECM program or relief over not being subjected to yet another year of concern over losing the program? You decide.

  • You have to admire and be impressed with the statistics given by my friend Jim Veale, he went into great detail and he has the experience to write the comment he did.

    However, on the bright side, the article does spread good news and gives us all optimism as far as the direction we are going with the HECM product.

    This is the rare positive financial news we have seen from any Federal Government agency in a long time!

    Our industry needs as much positive publicity and statistics we can get. We still have to give credence in what Jim says but at the same time we must stay on a positive footing from a mind set standpoint.

    John A. Smaldone

    • In the realm of government programs, where juggling the money around is routine, congress probably will be satisfied with the report; and that seems to be the bottom line of reality with regard to the sustainability of the HECM program.

      In other words, what government programs actually DO make money? Unlike private insurance companies, a government program counts taxpayers’ money as an asset, not a liability to be paid back.

      That’s how they think. If they (administrators of government programs) can present a positive fiscal result, no mater how they do it, in the mind of Washington, that’s a success (it will get further support from congressmen)..

      It’s ironically like the HECM itself, it never “has” to be paid back.

      • Travel,

        The HECM is normally paid back. The question is whether HECM insurance premiums are sufficient to at least cover lender loss reimbursements and assignment losses and specific costs. As of 9/30/2015, it is estimated that it take about $684 million to cover all such reimbursements and other specified costs.’

        While we might want HECMs to be self sufficient, those in the MMI Fund in particular never will be.

    • John,

      After reading your comment, it is clear mine is deficient and grossly inadequate. Here is the point of the comment above.

      Two of the three components of the balance in the HECM portion of the MMI Fund have absolutely nothing to do with HECM activity but rather the heavy hand of HUD.

      Over the last four years it has been hard to listen to some of the severe criticism HUD has received from members of our own industry over the actions of HUD. While HUD may not be able to accommodate all desires of all industry members, look at what they have done for us. Without their transfers of funds into the HECM portion of MMI Fund, would we even have a program today?

      If anything, the applause should have been for the senior management of HUD over the last six years for their confidence in the program. We need to be clear what we laud. Too often emotional relief overrules reason.

      So the point of my comments is that the applause should have been directed at HUD in gratitude for their diligence in ensuring the continuance of the HECM program, not some vague financial miracle.

      • Jim,

        I understand my friend. I did not mean to put you in an uncomfortable position, you are always the man my friend and always will be. I just wanted to put a little brightness to the subject.

        You and your family have a very safe and Happy Thanksgiving.

        John

      • John,

        You did not put me on the spot but rather pointed out a weakness in my original comment, so I thank you and have a great Thanksgiving.

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