Get Government Out of Reverse Mortgages, Commentator Says

The Department of Housing and Urban Development should not be in the business of insuring reverse mortgages, a Heritage Foundation researcher claimed in a commentary piece published Tuesday.

Writing for The Daily Signal, a conservative news and commentary website founded by Heritage, John Ligon claimed that HUD’s backing of Home Equity Conversion Mortgages is a drag on taxpayers that holds back private-market competition in the reverse mortgage marketplace.

“Overall, American homeowners deserve to have more options in reverse mortgages than the limited set engineered by federal bureaucrats, and taxpayers should not have to cover the costs of the Department of Housing and Urban Development’s financially insolvent loan program,” Ligon wrote.

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Ligon, who focuses on housing and tax policy in his research work for the right-leaning D.C. think tank, points to the most recent actuarial review of the Federal Housing Administration’s Mutual Mortgage Insurance Fund (MMI), which placed the HECM Fund’s economic value at negative $7.72 billion for fiscal 2016.

“Federal taxpayers could face growing economic losses in the insurance program over the next several years,” Ligon wrote, calling out the actuary’s prediction of negative $12.54 billion in economic value by 2023.

His piece did not note the general volatility of the HECM Fund: For instance, the 2015 actuarial report assigned an economic value of positive $6.78 billion, with a projection of $13.67 billion in the black by 2022; in 2014, the actuarial review found a value of negative $1.17 billion, with a projection of positive $1.04 billion by 2021.

Ligon additionally called out the higher default rate on HECMs as compared to home equity loans and other “forward” mortgages: Specifically, Ligon cited research from the November 2015 issue of the Journal of Urban Economics, which found a tax-and-insurance default rate on HECMs of just under 12%. By comparison, Ligon wrote, home equity lines of credit and other forward loans have default rates under 10%.

Instead of the current system, Ligon advocates for a purely private reverse mortgage industry, linking to a 1996 study about HECMs that includes a tidbit about the first reverse mortgage, a private loan issued in Portland, Maine in 1961.

“A private reverse mortgage market predates the federal government’s foray into home equity conversion mortgages, and more importantly, homeowners already have private means to borrow against equity the have accumulated in their homes,” Ligon wrote, referring to “forward” home equity lines of credit. 

While Ligon’s opinion obviously does not reflect that of the current government, it does provide an interesting window into one particular conservative attitude toward reverse mortgages at a time when the industry is anxiously awaiting news about the program’s fate under the new HUD budget; as RMD reported earlier this month, the department would see its total bankroll slashed by 13.2% if President Trump has his way, though specific details about program-by-program funding aren’t expected until May.

Taken objectively, the concept of the federally-backed HECM combines both stereotypically “liberal” and “conservative” approaches to personal finance: Despite being insured by the federal government, the program also allows consumers to fund retirement or other expenditures with their own private equity, potentially allowing them to avoid the use of state-funded relief programs.

President Reagan signed the legislation that kicked off the federal HECM program back in 1988; after a positive pilot program, it was expanded under the administration of his successor, the first President Bush.

Read Ligon’s full piece here.

Written by Alex Spanko

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  • Limiting this comment to the actuarial reports, it is clear that Mr. Ligon is an amateur in his analysis of actuarial reports. Rather than analyzing all of the reports, he limits his research and comments primarily to the 2016 report and if any more, little more. How difficult would it have been to look at all of them since they only start in 2009? The historical data in those reports would only make things worse. So let us be grateful for ineptitude.

    As to trying to foist the projections in the fiscal 2015 actuarial report as more relevant in 2017 than a report on fiscal 2016 by the same actuarial firm is inane. Other than its historical empirical information, drop the nonsense of any defense of the industry by using critically old projections based on now out of date information. It simply is unjustified and makes our defense look not just weak but worse, desperate.

    If HUD believed the reports were misrepresenting the HECM portion of the MMI Fund, it could shop for a better report. Yet HUD only did that for fiscal 2013. As to the quality of the fiscal year 2016 report, that is being looked into by those more familiar with valuation of portfolios of this nature.

    It is hard to believe that the loss picture currently being painted by the fiscal year 2016 actuarial report is materially in error. Currently we are seeing large numbers of fixed rate HECMs reaching their eligibility for assignment. These products will soon be terminating in ever larger numbers. The pent up recognized but not realized losses are about to break resulting in large consumption of cash reimbursements to lenders along with short payoffs to the unassigned pool.

    For those who are confused by accrual versus cash method reporting, much of the differences should evaporate over the next decade as more and more fixed rate Standard HECM terminations rise. It would help if the actuaries provided HECM cash flow since fiscal 2009 in its fiscal 2017 report due out in December 2017.

    • Do you know if annual HECM cash flow has been reported anywhere consistently? I’ve seen the numbers for 2012-2016 (forward FHA as well), but I’m interested in 2004-2011. Thanks!

      • Mr. Neumeyer,

        First you are wrong. Please identify where you got the cash flow for HECMs endorsed before 10/1/2008 for ANY fiscal year? Those endorsed HECMs are NOT in the MMI Fund and are not reported in reports solely related to the MMI Fund.

        Please do not confuse the issue. HUD annually reports to Congress on the MMI Fund. That information has not been verified by any independent party. You will find a schedule showing cash flows for the HECMs that are in the MMI Fund but not the HECMs still in the General Insurance Fund.

        If you are going to find anything about the cash flow for HECMs endorsed before 10/1/2008 you will have to go to HUD reports (if any) with that information on the General Insurance Fund. Before 10/1/2008, there was no actuarial report on the HECM program and as to HECMs endorsed before 10/1/2008, there still is NO actuarial reports. So to the best of my knowledge you will only find separate reports for fiscal years 2009-2011, if that.

        As you well know FHA tells Congress in its fiscal 2016 report that the net cash flow from the annual operations of HECMs has been negative since fiscal 2013 but does not report cash flow on any fiscal year before 10/1/2012. So those in our industry who swear up and down that the HECM Fund has never had negative cash flow do NOT read those reports. Ignorance is bliss.

        I cannot find cash flow information similar to that reported in the FHA report to Congress on fiscal year 2016. If you find it, please let us know.

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