HUD Budget Shows Continued Promise for Reverse Mortgage Program

The Department of Housing and Urban Development’s (HUD) annual budget proposal for fiscal year 2017, released Tuesday by the Obama Administration, shows continued promise in the agency’s reverse mortgage book of business.

The eighth and final budget issued by President Obama, the FY 2017 Budget proposes a $4.1 trillion spending plan over the course of the next fiscal year, beginning October 1, 2016.

For HUD, the President’s Budget provides the agency with $48.9 billion in gross discretionary funding and $11.3 billion in new mandatory spending over the next decade targeted efforts such as rental assistance, homelessness assistance, supporting tribal communities, investing into communities to improve housing affordability and revitalize high-poverty neighborhoods.

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“HUD’s proposed budget was built on the values that we uphold as Americans. That our entire nation benefits when our children grow up in a community that’s full of promise, not problems,” said HUD Secretary Julian Castro in a prepared statement.

In total, HUD’s proposed budget for FY 2017 represents a $1.9 billion increase over the enacted funding value from FY 2016, according to Secretary Castro during a press call Tuesday afternoon.

As for the Home Equity Conversion Mortgage (HECM) program, the budget indicates HUD expects continued positive cash flow for fiscal year 2017.

Breaking down the Federal Housing Administration’s Mutual Mortgage Insurance (MMI) Fund, which comprises FHA’s single-family mortgage portfolio and the HECM book of business, the HUD budget projects a guaranteed loan subsidy rate of -0.33% for the HECM portfolio.

A positive subsidy rate would indicate the program is projected to generate negative cash flow, or a loss. So while last year’s budget projected a subsidy rate of -0.69%, the HECM portfolio in 2017 is expected to generate slightly less positive cash flow than it did according to the previous fiscal year’s projections, however, HUD remains confident in the program’s strength.

“This [HECM] is something we’ve monitored closely over the years,” Castro said in response to a question from RMD during Tuesday’s media  call. “We are pleased with the legislation that has helped out the HECM portfolio. It’s something we believe that, when used appropriately, can be a net benefit for older Americans.”

Last November, a $7.9 billion increase in the economic value of the HECM portfolio propelled the MMI Fund to a $19 billion gain in FY 2015, according to FHA’s most recent Actuarial Report. The positive performance even garnered applause from HUD.

“In our last MMI Fund report, the HECM portfolio did much better than the year before and helped drive us across the 2% capital reserve ratio,” Secretary Castro told RMD. “We continue to believe this is a portfolio that can work and we believe it can continue to perform strongly.”

For 2017, HUD’s budget requests a limitation of $400 billion on loan guarantees for the Mutual Mortgage Insurance (MMI) Fund; projects insurance of $204 billion in single-family forward mortgages and $18.5 billion in Home Equity Conversion Mortgages (HECMs).

The budget also requests an appropriation of $160 million in administrative expenses, which will allow FHA to implement improved risk management and program support processes critical for the agency’s overstay of the MMI Fund.

Over the years, FHA has made multiple policy changes to strengthen the MMI Fund, including requiring manual underwriting for loans with credit scores below 620 and debt-to-income ratios greater than 43%. To improve access to credit without negatively impacting the MMI Capital Reserve Fund, in January 2015 FHA implemented a 0.5 percentage point reduction in the annual insurance premium.

Even the HECM program has seen several critical policy changes over the past year, including the implementation of the Financial Assessment and updates to the non-borrowing spouse policy.

“HUD is pursuing comprehensive legislative changes to give FHA the tools it needs to build upon the many administrative steps it has taken since 2009 to improve FHA single family programs,” HUD stated in its budget. “These proposals will allow FHA to enhance enforcement, create certainty for FHA approved lenders, and increase loss mitigation opportunities for borrowers with FHA approved loans. In total, these steps will reduce losses to the MMI Fund.”

The HUD FY 2017 budget also includes $47 million for housing counseling assistance, the bulk of which funds grants to HUD-approved counseling agencies.

“In particular, the Office of Housing Counseling is focused on expanding the number of counseled FHA borrowers and increasing access to resources that create more sustainable housing opportunities for households,” HUD wrote in its budget. “As the economy improves and the number of first-time homebuyers increases, the need and demand for housing counseling will increase as well.”

View the proposed FY 2017 HUD Budget.

Written by Jason Oliva

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  • Jason writes: “As for the Home Equity Conversion Mortgage (HECM) program, the budget indicates HUD expects continued positive cash flow for fiscal year 2017.” This is an excellent example of using financial terms (federal government in this case) incorrectly and inaccurately.

    First, the budget does not address the cash flow of the HECM program as a whole. Part of the HECM program is still accounted for in the General Insurance Fund but most in the Mutual Mortgage Insurance (MMI) Fund. All that Jason is referencing is the MMI Fund portion.

    Second, it is not even the overall cash flow from the HECM program within the MMI Fund during 2017 which is being addressed. Federal budgetary law requires that government agencies the cash flow from the new activities (business) generated during the fiscal year so that those activities are fully funded during the fiscal year they are added to that agency. So what is being addressed is the projected cash flow on a discounted basis from HECMs which are endorsed in fiscal 2017.

    After all of the confusion that occurred with the first budget President Obama proposed for fiscal 2010, it is surprising to read yet another RMD article bringing up the same confusing concepts. See http://reversemortgagedaily.com/2009/05/07/obama-administration-requests-798-million-to-aid-reverse-mortgage-program/. (Somehow some time after comments were posted, DISQUS confused my comments with others and thus you will find me addressed as a commentor but not named as a commenter. All of us for whom that happened are shown as Question Mark).

    • Jason,

      I am glad to read “book of business” now in the article and that you left the quotation alone. It is important that readers understand what budget projections actually mean.

  • I read Jim Veale’s comment carefully, I suggest everyone read it as well. The information, though technical in nature, is very valuable for us all to understand.

    As I read the article I felt Jason did a great job, as usual, with what he had to work with. However, Jim’s comment focuses on what the budget does not address, which is as equally important.

    Yes the way the budget is proposed and written, it does show continued promise for the reverse mortgage industry. I do believe that to be true but there are many things not brought out in the budget, as Jim points out.

    When you see a budget like this, one would think the Feds have our seniors best interest at heart? However, when I see no increases in senior citizen’s social security checks and no increases for our disabled American Veteran’s, it makes you think real hard about what the true meaning of deceit is all about!!

    Mind you, the Federal Government came out and said the hold back of increases were due to gas prices going down! Our Federal Government not only insults the minds of the American senior population but they sure think we are very stupid as well!!! On one hand, a budget like this shows passion but on the other hand, what I just pointed out shows just the opposite!!

    Getting back to the article, Jason did a great job with what he had to work with, Jim came out with the statistics the HUD budget did not address.

    Overall, there should a lot of optimism about our industry on the part of all of us. We have more going for us now than we ever had. If everyone has been following Jason’s articles and reads daily this publication, you can see it, feel it and should be experiencing it!!!

    Have a great long weekend everyone,

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      Thank you.

      What is important is that readers understand that only the book of business for fiscal year 2017 is being addressed. The overall projections for how all HECMs endorsed after 9/30/2008 will not be known until the actuarial report for fiscal year 2016 (generally) in November 2016.

      You are right that our future is bright but we should not be expecting substantial increases in annual endorsement totals for at least a few years down the road.

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