[Update] FHA Financial Picture Improves, Despite Reverse Mortgage Losses

The financial condition of the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance (MMI) Fund improved in fiscal year 2016, despite reverse mortgage volatility that dragged on its portfolio.

The forward portfolio is valued at approximately $35 billion, while the HECM portfolio is valued at negative $7.7 billion, according to an independent actuarial review of the agency’s insurance fund, released in a report Tuesday. The HECM value is down from a positive value of $6.8 billion upon last year’s review.

FHA exceeded its mandated 2% capital reserves threshold during the year, despite the HECM losses, Department of Housing and Urban Development officials told attendees of the National Reverse Mortgage Lenders Association annual conference in Chicago. Independently, the forward book of business has a capital reserve ratio of 3.8%, while the HECM program’s reserve ratio is negative 6.9%, amounting to a combined positive 2.3% total.

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“Last year, the HECM program was a contributing factor which helped the capital reserve ratio increase, but this year it did not—the momentum was completely driven by the forward [mortgage] program,” said Bob Mulderig, acting deputy assistant secretary for HUD’s Office for Single-Family Housing, during a reverse mortgage industry conference in Chicago this week.

Substantial program changes have been made since the previous FHA review, including the implementation of a reverse mortgage financial assessment for all borrowers. These changes are seen as positive for the industry, but loans endorsed prior to the changes are contritbuting to the outcomes associated with the HECM portion of the fund, said NRMLA President and CEO Peter Bell.

“The overall positive FY2016 Actuarial Report shows the MMI fund continuing on its upward trajectory to protect itself and taxpayers, from volatility in the marketplace,” Bell wrote in a statement. “However, with new modeling and calculations of FHA’s reverse mortgage portfolio, the actuaries show a decline in the HECM capital ratio from 6.4 percent in FY 2015 to negative 6.9 percent in FY 2016, mainly attributable to losses on loans endorsed prior to substantial program changes that were implemented in 2013, 2014, and 2015. The policies, which were introduced to make HECM loans more sustainable for borrowers and to mitigate risks to the MMI Fund, include limits on upfront draws, changes to the structure of mandatory insurance premiums, and new financial underwriting requirements for borrowers.”

The effect of the changes has not yet been realized, but the expectation is that they will be positive overall for borrowers and for the HECM program.

“While it is still too early to see the results of the changes, modeling and analysis completed earlier this year by Dr. Stephanie Moulton from the Ohio State University and others, shows that the combined impact of the new policies should cut the risk of HECM defaults in half,” Bell continued.

HUD’s projections for the HECM portfolio were above the actual value, while projections underestimated the positive value of the forward book of business. The forward portfolio was $10.1 billion above projection, while the HECM portfolio was $14.3 billion below projection, leading to an increase in the capital ratio overall, but causing industry participants to question HUD’s accounting method going forward.

“An important subtext to this report is the continued volatility in the HECM book of business, which this year turned negative, dragging down the overall value of the MMIF,” said Mortgage Bankers Association (MBA) President David Stevens. “Given the importance of FHA to low and moderate income and first time homebuyers, the next administration may want to look at accounting for the two programs individually in order to isolate the critically important forward book from the wild swings of the HECM fund.”

Both FHA and the MBA responded favorably to the report, despite the HECM vulnerability.

“Today’s positive report on the state of FHA will most likely renew calls for a reduction in FHA fees,” Stevens continued. “It is a worthwhile conversation, but must caution that today’s report again shows the vulnerability to the reserve fund posed by the volatility in the HECM book. Given the HECM volatility and recent concerns about liquidity in the Ginnie Mae market, these discussions should occur with an eye toward long term stability for the FHA program.”

Written by Jason Oliva and Elizabeth Ecker