Should FHA Exclude Reverse Mortgages from the MMI Fund?

Last month, the Federal Housing Administration (FHA) revealed a $19 billion gain to the economic value of its Mutual Mortgage Insurance (MMI) fund in Fiscal Year 2015, driven in part by a nearly $8 billion growth in the reverse mortgage book of business. While this performance signaled a welcoming improvement for the MMI fund, a new report suggests that FHA is misleading in the way it calculates its financial status.

Overall, the MMI fund in FY 2015 stands at an economic net worth of $23.8 billion. This amount is comprised of the Home Equity Conversion Mortgage (HECM) portfolio and FHA’s single-family forward mortgage portfolio, which grew roughly $11 billion to an economic value of $17 billion in FY 2015.

Taken as whole, the HECM portfolio represents about 9% of total FHA lending, with the current insurance in force for the forward portfolio at $1,046 billion and only $105 billion for the entire HECM book of business.

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Since 2009, the FHA has calculated the value of its MMI fund by lumping together its traditional forward loan portfolio and its smaller reverse business. But the agency may be neglecting to show an accurate depiction of how each loan program performs financially, according to a report published this week by the Urban Institute.

“By combining two very different programs, the administration’s assessment masks the programs’ individual performance, potentially encouraging policy changes—like increasing or decreasing fees—that may not actually be justified,” says the Urban Institute’s Laurie Goodman in the report.

Because of this, Goodman suggests the FHA should separately assess the financial solvency of its forward and reverse mortgage businesses starting in 2016, and for a number of reasons, mostly due to the volatility of the HECM program and its susceptibility to changes in interest rates.

The $7.9 billion increase in the HECM portfolio for FY 2015 lifted the program’s net worth from a deficit of $1.17 billion in FY 2014 to a value of positive $6.78 billion. The performance of the HECM book also showed huge swings over the years, varying between negative and positive territory from FY 2012 to 2015 (Click chart below to maximize image size).

“Despite its small size, this high volatility makes FHA’s much larger and more stable portfolio appear more volatile than it really is,” Goodman writes.Screen Shot 2015-12-01 at 9.18.57 AM

The HECM business is also highly unpredictable, Goodman adds, since it is more closely linked to interest rate changes than the value of the majority of FHA’s business.

“If we assume that half the HECM business is at a fixed rate and that each 1 percent rise or fall in rates causes a 12 percent fall or rise in the value of the loan, that would explain most of the drop in the value of the fund last year and much of the rise in the value of the HECM book of business this year,” Goodman writes.

The relationship between interest rate changes and value swings also offer up something of a catch-22 when it comes to policy changes.

“Given the close tie between interest rates and HECM swings, the accounting effect of policy changes in the HECM program are dwarfed by changes in interest rates,” Goodman writes. “Yet, when FHA reports that the MMI value exceeds or fails to meet expectations, a call for new policies is inevitable.”

Public policy would be better served, Goodman suggests, if there was a more accurate picture of the status of both programs, then each of them could have their own tailored policy changes accordingly.

An example relates to the calls from various mortgage industry groups who view the improvement in the MMI fund as an opportunity to cut premiums, however, in actuality, the 1.63% capital ratio of FHA’s forward loan book is below the mandated minimum of 2%, suggesting there should not be a premium cut this year.

This year is a good time for the FHA to remove HECMs from the MMI fund, Goodman suggests, since interest rates in November 2015 are largely unchanged from November 2014. Additionally, this November’s rates will determine the discount rate used to calculate the 2016 MMI fund’s net worth.

But as future rates rise, Goodman notes that the HECM book of business could “cast a pall over the MMI fund.”

“It’s time to stop publishing a distorted picture of the value of the MMI fund,” she writes. “We should separately assess the forward and reverse mortgage businesses when determining FHA’s financial status. The coming year is the right time to make this change.”

Written by Jason Oliva

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  • Perhaps the distortion has more to do with the composition of the ending balance in each MMI Fund program, not results of a single year of operations. Although a substantial portion of the HECMs endorsed before 10/1/2008 have terminated, it is only those which were endorsed after 9/30/2008 which are included in the MMI Fund accounting of the HECM program.

    Unfortunately it was not until the budgetary battle for fiscal 2010 that OMB forced FHA to not only take a strong look at the assumptions it was using in in how it determined Principal Limit Factors.(PLFs) but also the value of the endorsed HECM portfolio. At the start of fiscal 2010, PLFs were decreased 10% across the board. Now came the question of HECM portfolio valuation. As it became apparent that there was a significant valuation loss, FHA transferred $1.748 billion from other MMI Fund programs into the HECM portion, not as a liability but as a contribution to its ending balance. It did this again in fiscal year 2011 but the amount was only $0.535 billion. Yet despite these transfers at the end of fiscal 2012, the HECM portion of the MMI Fund almost ended up with a $2.8 billion negative balance. So during fiscal year 2013, not only did FHA take $4.263 billion out of other MMI Fund programs but also took an additional $1.686 billion out of the US Treasury and transferred the entire $5.949 billion into the HECM portion of the MMI Fund. In fiscal 2014, FHA paid $0.770 billion out of the HECM portion of the MMI Fund and transferred it to another MMI Fund program.

    So at the end of the day, there is $6.778 billion in the HECM portion of the ending balance of the MMI Fund but 1) $5.776 billion of that comes from net transfers out of other MMI Fund programs, 2) $1.686 billion comes from a transfer out of the US Treasury, and 3) a net HECM lender reimbursement activity loss of $0.684 billion.

    So absolutely none of $6.778 billion in the HECM portion of the MMI Fund comes from positive operating activities but rather the transfers by FHA to bolster the HECM program. The separate accounting will most likely only lead to placing the HECM program into the spotlight when it cannot withstand that kind of exposure. We are much better off leaving things the way they are.

    • The HECM program is intended, as it should be, to be self-sustaining. If current combined accounting is masking a failure in that regard, it should be changed so that appropriate policy decisions can be made.

      If accounting methodology made the forward FHA program appear stronger at the expense of the HECM program, the HECM industry would be clamoring for a change.

      I make my living selling HECM loans, but I don’t want to be selling another “entitlement” subsidized, directly or indirectly, but the taxpayer.

      • REVGUYJIM,

        The program is not designed to be self-sustaining. Taxpayers pay for all HUD employee costs who are involved in the HECM program which is hidden in the budget and annual appropriations. Taxpayers pay for ALL operating and administrating costs of the program. Those costs are never included in the accounting for the program in the MMI Fund.

        The only costs of the HECM program included in the MMI Fund are reimbursements and expected reimbursements from the existing HECM pool (along with certain assignment costs). Even the costs of the actuarial report, the annual auditors’ report, and the FHA annual report to Congress, and allocations to counseling agencies are all paid for through the appropriations process.

        As to your last paragraph, stop living in dream land and read the annual auditors’ reports and annual actuarial reports. They are online. The HECM program like all HUD programs is subsidized by the US Treasury. The awakening came when FHA took funds out of the US Treasury to support the HECM portion of the MMI Fund which showed with several exclamation marks that MIP is insufficient to meet current and future lender and FHA (HECMs in assignment) loss reimbursement costs.

        The actuarial reports can be downloaded from

        http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/actr/actrmenu

        Please let me know if your analysis results in anything different than mine.

        The program is not financially self supporting or sustaining. It is not designed to be. BUT the loss reimbursement activity should be but, sad to say, that is doubtful at least for now.

      • I was responding to your excellent post re the accounting of the MMI Fund, NOT the administrative costs of the program. Given the context, I did not think it necessary to make that distinction but appreciate your doing it for those who may have misunderstood.

        I stand by my closing statement, and believe we may share some common ground from YOUR closing statement about self-support/sustainment: “…the loss reimbursement activity should be but, sad to say, that is doubtful at least for now.” I think separate accounting could remove the “doubtful” from that statement, one way or the other.

      • REVGUYJIM,

        While not agreeing with window dressing that makes an overall loss from operations look like $6.778 billion in cumulative net income, there is, at the same time, the need to protect the program from undue scrutiny. There is a way to improve HECM program reporting without removing it from the MMI Fund.

        Congress placed the accounting for HECMs endorsed after 9/30/2008 for a reason. As long as the ending balance in the MMI Fund is adequate, putting the HECM with its volatility into its own separate fund seems unnecessary. A clear picture can be handled by adding a category to assets and liabilities to individual program reporting called transferred funds divided into other MMI Fund programs and US Treasury. By using pluses for funds transferred into a program and a minus when transferred out, the amounts should offset in consolidation so that the presentation is clear. Transfers from the US Treasury would show up as positive both at the individual program level as well at the consolidated level.

        Senior management at HUD seems to be trying to manage the HECM program so that the loss reimbursement portion will eventually stay in a range closer to zero. Starting the proportionate return of the funds transferred out of other MMI Fund programs into the HECM program while keeping the $1.686 billion in the HECM portion of the MMI Fund seems appropriate for the time being; however, these transfers should be categorized so that they are displayed separate from the cumulative results of annual loss reimbursement operations.

        When most people hear that a government program is self-sustaining, it is generally assumed that the program pays for all of its costs. The costs of running government programs should be transparent, not politically opaque. Because of vague cost accounting reporting standards, government costs are out of control. That is why it is important to stop hiding program costs by referring to a program as self-sustaining when in fact it is only a portion of that program which is being referred to.

        While this response is long its purpose is to persuade how MMI Fund reporting can be improved and provide sufficient transparency that accounting under a separate fund would accomplish little clarity.

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