Former HUD Official ‘Worried’ About Higher Reverse Mortgage Costs

Under new guidance set to go into effect October 2, Home Equity Conversion Mortgage borrowers will be able to tap into a smaller percentage of their home equity — while many will pay higher mortgage insurance premiums at the time of origination. And one former Department of Housing and Urban Development official says he’s concerned about the effects that the change will have on older homeowners.

“I’m very worried about elderly people who rely on the program, and the fact that it’s going to cost them more money to access what they can [from the] HECM, which really keeps them in their homes and allows them to get the value they need to do what they want to do,” former assistant HUD secretary Orlando Cabrera told RMD in a phone interview.

Cabrera, who oversaw HUD’s Office of Public and Indian Housing under the George W. Bush administration, said that unlike many in the industry, the new rules didn’t take him much by surprise.

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“I’m surprised it’s a surprise,” said Cabrera, now a partner at the Washington, D.C. law firm of Arnall Golden Gregory. “We’ve watched Congress kind of tremble in fear of FHA’s exposure a couple of times over the last decade, and when you see the HECM world within HUD take on water, they’re going to react.”

In announcing the changes on Tuesday, HUD officials cited the $7.7 billion negative value that the HECM program brought to the Mutual Mortgage Insurance Fund in fiscal 2016, as well as the nearly $12 billion the department says HECMs have cost the fund since 2009. The officials warned that the fund would require an appropriation from Congress if action wasn’t taken immediately, leading to the higher premiums and lending limits.

A serious aversion to asking Congress for a bailout likely played a major role in the decision, Cabrera said.

“This is entirely related to the fact that there is such stress at HUD about going and asking for appropriations,” he said. “They’re trying to do anything they can to keep that from being part of the conversation, or at least minimize what they have to ask for.”

But Cabrera questioned whether or not these moves will help solve the problem of stress on the MMI fund, which even HUD admitted wasn’t necessarily the endgame; these changes will only help put future loans on a more solvent track, HUD officials said Tuesday, and not reverse any losses already on the books.

“I suspect there’s more at play than just HECM, because HECM’s not a massive amount of FHA’s overall portfolio,” Cabrera said. “It’s become a significant problem, but FHA is a lot bigger than HECM.”

In the end, while the regulations may not have a major effect on problems within the MMI Fund, they will have an immediate impact on seniors considering the program.

“Of all the populations that FHA serves, certainly the elderly is one of the most important of them, and this isn’t going to help them,” Cabrera said.

Written by Alex Spanko

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  • As of September 30, 2016, the HECM actuaries estimated that the net asset position of the HECM portion of the MMI Fund was a negative $7.7 billion BUT that is after transferring a net of $5.8 billion in funds from other MMI Fund programs into the HECM portion of the MMI Fund and allocating solely to the HECM portion of the MMI Fund all of the $1.7 billion previously taken from the Treasury to offset the negative net asset position of the entire MMI Fund.

    So the total cumulative net losses from HECM operations reflected in the MMI Fund stands as of the end of fiscal 2016 at $15.2 billion. There is no way that HECM operations will make up these losses so that the HECM program can once again be said to be self sustaining. The self-sustaining argument is mere myth.

    This is not the end of the HECM program but rather a rude awakening of what it will need just to stop program hemorrhaging. The fact is no one is sure if these steps alone are sufficient; for example, one question is why was ongoing MIP reduced to 0.5%. The proposed 10/2/2017 changes were intended to mitigate the actuarially expected losses from the fiscal 2018 new book of business. We will not have any idea until the actuarial report for fiscal 2018 is released sometime in November or December 2018 if these changes were sufficient.

    While some feel for the seniors, there is no little concern expressed for American taxpayers or for the responsibility of the executive management at HUD that has tried to dress up what was happening in the HECM program throughout the Obama Administration. Once such actions begin, there seems to be no end to it and few who want to accept responsibility for it. Sadly the vast majority responsible for the dressing up of the losses are no longer at HUD. Instead today, the actuaries are being undermined for fulfilling their professional responsibilities by reporting what their projections indicated and currently indicate.

    Despite what many believe, increased endorsement volume is more likely to increase the losses than help turn things around. While more MIP will be generated, statistically these new HECMs will result on a discounted cash flow basis in even greater losses than the MIP they will generate.

    No amount of financial assessment could have substantially mitigated the over 106,000 termination claims made by lenders or 56,000 endorsed HECMs assigned to HUD during the period of June 1, 2013 through June 30, 2017. So of the 266,000 HECMs no longer accounted for in the MMI Fund during the 49 months indicated above 39.1% were due to full payoffs, 21.1% were assignments, and 39.8% were terminations with lender claims.

    Every time HUD tried to stem losses in the MMI Fund throughout the Obama Administration, the result has been ever growing MMI Fund losses by accompanying transfers from other MMI Funds and the transfer out of the US Treasury. Some in our industry have mistakenly tried to tie the projected losses to just fixed rate Standards but as of September 30, 2016, the actuaries projected losses for every new book of business from 2016 to 2023. The size of the estimated loss for the new book of business for fiscal 2016 is $1 billion by itself.

    The HECM actuaries anticipate that by 9/30/2023 with the HECM we had as of 9/30/2016, the negative net asset position of the HECM portion of the MMI Fund will grow from $7.7 billion to $12.5 billion just from new business and the losses incurred to support the net loss position of the HECM portion of the fund. That means the actuaries anticipate the cumulative losses from HECM operations will exceed $20 billion by September 30, 2023. See Page 18 of the fiscal 2016 of the HECM actuaries at

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

    Making the current changes is long overdue. Now the question should be asked why it is important to keep financial assessment as strict as it currently is. Remember financial assessment measures borrower capacity to pay taxes and insurance. Financial assessment has absolutely nothing to do with measuring or testing the adequacy of anticipated appreciation on collateral. The losses we are currently incurring come from the lack of sufficient collateral appreciation across all loans to totally offset the liabilitities building on HECMs.

    It is refreshing to see HUD actually trying in a deliberate fashion to stem the flow of continued losses from NEW business. Will endorsements turn down as a result of these changes? All indications are that they will. This is why financial assessment should be adjusted to permit more seniors to qualify without completely terminating financial assessment.

  • It seems like everyone thinks the only cost increase to the seniors is the MIP. The forced lower margins will make the lenders bring back service fees and full origination fees that eclipse the MIP.

    • RMMP,

      MIP is the only known cost. While we agree that servicing fees (which some lenders brought back a while back) and origination fees will be in play, that is speculation and not extremely high in the scope of things.

      The problem for lenders has been and remains is explaining to borrowers how the set aside for servicing fees works.

  • All of what everyone is saying is true in some cases and very well most likely come to fruition down the road as RMMP puts it.

    My question is, what can we do about it, nothing but live with it! We have to move on, accept what will be and go after new markets, go after higher value properties with low loan to value ratios, there are enough of them out there!

    As one former Department of Housing and Urban Development official said in the article, “He is very worried about elderly people who rely on the program, and that it’s going to cost them more money to access what they can from a HECM”

    This is all true but here again, not much we can do, other than to keep the HECM program going and realize there is a great deal of good the program will do for millions of senior homeowners!

    As my friend Jim Veal said, “This is not the end of the HECM program but rather a rude awakening of what it will need just to stop program hemorrhaging”

    Jim is right on target with that statement, that is the good news Jim pointed out. The other good news is we are all still alive and our business and the good we can still do will flourish!!!

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

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