[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

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  • Wow, a $14 billion loss incurred last fiscal year? Reading what the actuaries have to say, it seems they are looking at lower home appreciation rates throughout the country. Worse they are projecting losses through fiscal 2023, the last year they provide such information. It seems the ending balance in the HECM portion of the MMI Fund will go from a positive $6.8 billion at the end of fiscal 2015 to a negative $7.7 billion balance as of 9/30/2016 to a projected balance of a negative $12.5 billion as of 9/30/2023.

    My head is still spinning.

    Did I hear lower Principal Limit Factors or higher MIP or come combination of the two??

  • The actuaries blame the $14 billion loss for fiscal year 2016 primarily on 1) the problem of more costs related to the liquidation of the collateral following HECM termination and 2) lower sales prices on collateral than previously anticipated in HECM modeling.

    In their fiscal 2016 review the actuaries do not name a source for why the HECMs terminated; therefore, we cannot conclude that the cause was solely or even principally nonpayment of property charges.

    So that we do not lose focus on the negative growth to the ending balances of the HECM portion of the MMI Fund after fiscal 2016 (coming from what appears to be HECMs endorsed after fiscal 2016), it is important to note that the projection shows continued negative growth in the ending balance of the HECM portion of the MMI Fund through the end date of the projection. The projection ends on 9/30/2023 but there is no indication that this negative growth will end there. So how can one conclude that the losses are primarily related to HECMs endorsed before 10/1/2014? Perhaps that is true of the $14 billion loss of fiscal 2016 but not much else, if even that.

    A very pertinent inference from the projection of the growing negative ending balance of the HECM portion of the MMI Fund through fiscal 2023 is that the losses are coming from the book of new business endorsed each and every fiscal year after fiscal 2016.

    While the bleeding can be mitigated, if not eliminated, it will require drastic action now and perhaps less drastic action in the future when a better solution can be found. For now the actions that will shrink future losses are lowering Principal Limit Factors and raising MIP; neither is desirable but right now the greatest need is to take actions that will mitigate the exposure of the program to Congressional scrutiny.

    • I have not heard of either a PL reduction or and MIP increase from anywhere except the comments on this article. If either or both were to happen not sure 2017 endorsements would be even 75% of 2016. Would like to hear more from the people who make these decisions?

      • EricSD,

        You will have to go back to the spring and summer of 2009 to see an estimated loss and a reported proposal for reduction of PLFs and the winter and summer of 2010 to see an announced increase to the ongoing annual MIP rate.

        Yet on the day that the Annual Report of HUD on the MMI Fund to Congress and the Actuarial Review of the HECM portion of the MMI Fund were posted by HUD on its website, we have seen the following suggestions from former FHA Commissioners being posted in the National Mortgage News:

        Mr. Brian Collins states the following in the 11/17/2016 issue of the National Mortgage News (NWN): “‘It is certainly time to have a policy discussion around moving the HECM program from the Mutual Mortgage Insurance Fund back into the General Insurance/Special Risk Insurance Fund,’ said Brian Montgomery, vice chairman of The Collingwood Group…” and former FHA Commissioner.

        Mr. Collins quotes Mr. Stevens in that same article of NMN as saying: “”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 Mutual Mortgage Insurance Fund,’ said David Stevens, the president and chief executive officer of the Mortgage Bankers Association. ‘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.” The title of the article is “Troubled FHA Reverse Mortgage Program May Prevent More Premium Cuts.” Mr. Stevens is a former FHA Commissioner.

        The National Mortgage News article can be found at:

        http://www.nationalmortgagenews.com/news/servicing/troubled-fha-reverse-mortgage-program-may-prevent-more-premium-cuts-1091081-1.html

        At no time has the HECM program ever reported such a huge loss. There is no need for HUD to take any immediate action on lowering PLFs or increasing the ongoing annual MIP rate but wait until Congressional hearings on FHA later this summer.

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