New Regulations Raise Questions About Reverse Mortgages and MMI Fund

When the Department of Housing and Urban Development announced lower principal limits and higher upfront mortgage insurance premiums for certain reverse mortgage borrowers, officials cited the health of the Mutual Mortgage Insurance Fund as the primary motivator. Without decisive action, HUD said, the Home Equity Conversion Mortgage program would likely need a bailout from Congress to remain viable — a move that insiders have said the department would like to avoid at all costs.

But the HECM and the MMI Fund have had a complicated relationship, and HUD’s doom-and-gloom messaging about the reverse mortgage’s negative impact on the overall pool could renew calls to keep the forward and reverse programs separate.

Strange bedfellows

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The Federal Housing Administration has grouped forward and reverse mortgages in the MMI since 2009, using the funds to offset losses incurred by a variety of government-backed borrowers — such as when the value of a HECM borrower’s home isn’t enough to pay back the total bill at loan’s end. 

Each year, an independent firm performs an actuarial audit of the HECM’s impact on the program, and the results have varied widely: For instance, when rolling out the new principal limits, HUD officials repeatedly pointed to the fiscal 2016 report, which found that reverse mortgages cost the fund $7.7 billion — with a projected drain of $12.5 billion by 2023. But the previous year, the HECM fund generated a value of positive $6.8 billion, with the independent actuarial firm projecting a positive value of $13.7 billion in 2022.

These seemingly incoherent swings stem from the HECM program’s increased sensitivity relative to other FHA-backed products, according to Urban Institute researcher Laurie Goodman. Back in 2015, Goodman wrote a report for the Washington, D.C.-based think tank arguing that HUD should remove the reverse mortgage book of business from the fund — and her opinions haven’t changed nearly two years later.

“I think they shouldn’t be in the MMI Fund,” Goodman told RMD. “They have a degree of volatility, due to interest rate changes, that doesn’t really reflect what the MMI Fund is trying to measure.”

She noted that the value of fixed-rate loans will decline relative to other products as interest rates rise, which has happened over the past few years and is expected to continue over time. 

“It’s not going to look pretty over the next few years,” Goodman said.

In addition, subtle changes to the actuarial firms’ modeling assumptions can also have substantial effects on the calculated value of the HECM program, she noted. In the most recent analysis, for instance, auditor IFE Group used updated FHA projections that showed increased property disposition expenses and steeper home sale price discounts — leading to an $8.7 billion hit to the economic value of the reverse mortgage program. 

Forward frustration

As for HUD’s argument that HECM-related payouts have hamstrung the department’s ability to assist younger, first-time homebuyers — which secretary Ben Carson described as the target recipients of FHA assistance when announcing the new reverse mortgage rules — Goodman said the overall volatility of the HECM program might make the health of the forward portfolio difficult to determine.

“It increases the variability and clouds the picture for the forward mortgages, and it might be much harder to see what’s going on with that product,” Goodman said.

Brian Montgomery, the former FHA commissioner who last week received the nomination for a second stint at the position, has also advocated for a separation as recently as last fall, telling American Banker in November that the HECM program should be merged back into the General Insurance/Special Risk Insurance Fund due to “wide swings in the economic value.”

Written by Alex Spanko

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  • Here is the problem. How would the HECM portion of the MMI Fund be separated?

    The composition of the HECM negative net asset position in the MMI Fund consists of the three major components listed below and with the amounts related to those components shown to the right of each component as of 9/30/2016:

    HECM Estimated Losses ——————– $ (15.183) billion

    Net Funds Transferred from
    Forward Programs in MMI Fund ———- 5.776 billion

    Funds Transferred from US Treasury ——- 1.686 billion

    The Negative Net Asset Position of the HECM portion of the MMI Fund as of 9/30/2016 was $ (7,721,000,000) or $ (7.721) billion.

    Should the funds transferred into a new HECM Fund include funds from other programs and the US Treasury? Absolutely not. They were not generated by HECM activity. Even the Treasury amount transferred into the MMI Fund was intended to cover the losses of the overall fund at the time they were requested, not to pump up the HECM portion of that fund.

    Creating window dressing to cover up the losses was the product of the five fiscal years beginning with fiscal year 2010 and ending with fiscal year 2014. In fiscal 2014, $770 million was transferred back out of the HECM portion of the MMI Fund; thus the gross amount transferred into the MMI Fund from other programs in the MMI Fund was not $5.776 billion but rather $6.546 billion. The years of creating window dressing were those during the Obama Administration, most of which FHA Commissioner Galante was either Commissioner or Assistant Commissioner.

    Many have falsely described a reserve for the entire MMI Fund in which all of the prior (to the current fiscal year) net income from the operations of all of the programs were held. The annual Actuarial Reviews for only the HECM portion of the MMI Fund and a separate Review for all of the other programs strongly refute that concept.

    So again how much of the $27.6 billion in the MMI Fund as of 9/30/2016 should go into a separate HECM fund? A negative $15.183 billion? A negative $7,721 billion? Or something in between? It would seem the answer is negative $15.183 billion. Yet would that not draw the ire of some members of Congress?

      • Ed,

        What is the matter with you? What do you think has gotten us to where we are thus far, eating contaminated rye bread?

        Instead of making vague remarks why not try to tell us how that can be done most efficiently since you will fight anyone who says: “This will kick the can down the road most efficiently.”

        I really doubt if you know what you are talking about. I have been following your comments and replies and they are out there somewhere around Saturn.

        Unfortunately, the can will most likely be kicked down the road but efficiently or effectively, who knows?

      • Humm, I could ask the same question: what’s the matter with you?

        “Vague remark”? On the contrary, it couldn’t be more on point, politically. And I believe that politics is the driving force behind the latest round of changes to the HECM program.

        If you actually had followed my posts (we can’t do that with you, because you have your comments locked-out “for some reason”), you’d know that I’ve already written at length on the subject, and have honestly given the reasoning behind my comments (and I’ve made it clear that I post as an HECM recipient, not an industry professional); in an effort to contribute toward understanding the situation.

        Maybe you think that a different perspective has no value (And I suspect, unless it totally agrees with you), but fortunately, there are other people on this forum besides yourself.

      • Ed,

        Like you, I find my position the best until I am shown otherwise.

        So why is it that you suspect that the issue is political? I am not willing to see a fix come as a result of anyone’s mere belief. It seems you have no facts.

        Last week you were telling someone how there are only HECMs in the MMI Fund and now you have a fix. Is that based on your phony belief that there are just HECMs in the MMI Fund because if you still believe that, your input is worthless.

        What is the basis of your recommendation?

      • I never said anything of the kind. I said that the HECM insurance fund is billions in the hole. And it is. I never mentioned other funds or what funds are in or not in other funds: this was brought-up as a fabricated straw man by “the nitpicker.” I’ve now repeated this probably ten times. You’re the third one who has now volunteered to display their lack of reading comprehension ability.

        The second falsehood that you’ve managed to spew in a few short paragraphs: I never said anything about having a “fix.” In fact, my comments pointed out that there is no fix; the HECM program will continue to be bailed-out.

        And facts that the changes are political? Uh, do you have access to newspapers? If you do, then you obviously have no analytical ability, and the facts are wasted, regardless.

        Reading comprehension and analytical ability. You’d be better off working on these shortcomings than worrying about sticking-up for the nitpicker.

      • Mr. McSherry,

        Your recommendation reminds one of Wyatt Earp’s opinion of Doc Holliday in the movie Tombstone: “He makes me laugh.”

        It seems even Mr. Spanko has deserted you when he writes: “The Federal Housing Administration has grouped forward and reverse mortgages in the MMI since 2009….” and I bet you think that Mr. Montgomery, the former FHA commissioner, one of those HUDs as you call the good folks at HUD, has dishonestly muddied the waters by recommending “that the HECM program should be merged back into the General Insurance/Special Risk Insurance Fund….” Do you know anyone at FHA/HUD?

        Or perhaps you have forgotten what you wrote on September 13th, 2017: “…dishonestly tried to ‘muddy the water’ by adding-in the forward mortgage fund….” Mr. Spanko told us HUD put the HECM loans in the MMI Fund after 2008 and by that act “grouped forward and reverse mortgages in the MMI….” You will find all the places I quote you from at the following URL.

        https://reversemortgagedaily.com/2017/08/30/what-huds-new-rules-mean-for-the-reverse-mortgage-industry/

        So where is your HECM fund? In your own words: “I said that the reverse mortgage insurance fund….” What reverse mortgage insurance fund? Where do you find that? What is it? You can read the MMI Fund net asset position for 9/30/2016 on Page 5 of the HUD publication on the MMI Fund for fiscal 2016 at the following URL and it is over $27 billion positive:

        https://portal.hud.gov/hudportal/documents/huddoc?id=2016fhaannualreport1.pdf

        As Mr. Spanko implies in his shorthand all active HECMs endorsed after 9/30/2008 are accounted for the in the Mutual Mortgage Insurance (MMI) Fund where there have been forward mortgages before 10/1/2008. Then the General Insurance Fund that Mr. Montgomery, the former FHA Commissioner, is where you will find all of the accounting for active HECMs endorsed before 10/1/2008.

        You don’t care about HECM facts BECAUSE you and you alone have THE solution. As a HECM student forgive me if I would rather read what actual experts recommend but your recommendation has value, it does provide a great break and a hardy….. Oh yeah, please keep writing, it is a great release.

  • How easy is it to separate the HECM portion of the Mutual Mortgage Insurance (MMI) Fund into its own fund? Not easy since Congress in 2008 mandated the change.

    First the change that took place on 9/30/2008 was not a decision made by HUD. Congress ordered the change in Section 2118(b)(2) the Housing and Economic Recovery Act of 2008 (Public Law 110-289) enacted on July 30, 2008.

    All HECMs endorsed before October 1, 2008 are accounted for in the General Insurance (GI) Fund but after September 30, 2008 in the MMI Fund.

    The RMSA (Reverse Mortgage Stabilization Act of 2013) does not appear to allow the Secretary of HUD to make this change since it requires that in the determination of the HUD Secretary that such change is “necessary to improve the fiscal safety and soundness of the program….”

    It would seem that the only way to effectuate the suggested change would be through an act of Congress.

    • REVGUYJIM,

      For the following two reasons: 1) Congress mandated it in HERA as James states above, and 2) having a $7.7 billion dollar negative net asset balance as of 9/30/2016 rather than a far more accurate negative net balance of $15.2 billion. One negative net asset position seems to give many heart burn while the latter one would give far more complete torso burn.

      If HECMs were required to meet the 2% reserve requirement alone, goodbye HECM program. As part of the MMI Fund we are protected by the other programs.

      Why is it that this industry would want to be in a separate fund? Try and figure out even one benefit.

  • I wonder how Laurie would react over the $5.776 billion from other MMI Fund programs now sitting in the HECM portion of the MMI Fund, per James, if she knew that’s where it sits? Also what about the $1.686 billion from Treasury that also sits in the HECM portion of the MMI Fund in full when it was intended for the MMI Fund as a whole?

    We have a long way to go in figuring out what is best for the program but if a separate HECM Fund became subject to a 2% reserve on the MCA of all Single Family mortgages collateral like the MMI Fund is now, that would immediately give most of us the answer to this question which is leave well enough ALONE.

      • REVGUYJIM,

        I hate it when people tell me it is their humble opinion so thanks for NOT doing that. I really like that about your answer.

        So to you, I will restate the best answer in the words you want to see. In THIS case, please stick your head in the sand.

        But as to others, consider the alternatives and its not a pretty picture. In fact even though I am sure it would impact the permissible volume of HECMs we can have endorsed each fiscal year maybe it is best that the HECM program be moved back into the General Insurance Fund, retroactively as of 10/1/2008 but be drained of all transfers into the program from other programs and the US Treasury before that transfer is completed. Mr. Montgomery is very wise in his counsel. Now let us see if Congress will do that.

      • REVGUYJIM,

        I am not so sure if that was true in the first few fiscal years after 9/30/2008 but unfortunately I find myself agreeing with you today.

  • REVGUYJIM,

    Yet your suggestion would mean that rather than seeing the full impact of the HECM program we would only see the impact from those HECMs endorsed after 9/30/2008 which on its face seems distorted.

    The right way to do what you seem to be suggesting is remove the HECM portion of both the GI Fund and the MMI Fund and combine them into a new HECM only Fund. Another approach is to remove only active HECMs from each fund and then put them into a new HECM Fund so that all that would be reflected would be future HECM net operating income/(loss). Doing it the latter way would mean that realized losses would stay behind but recognized but unrealized losses would come into the new fund.

    So what is the right answer? We need to decide on what the new Fund should reflect then we can recommend how to achieve that goal.

    • My suggestion is that the HECM MMI fund be maintained separately. I made no suggestion re how that should be done, as I haven’t a clue.

      If you will pardon the analogy, a general should determine the strategy; the lieutenants can plot the course.

      • REVGUYJIM,

        Yet the strategy and actual course of action is what is expected of HUD. BUT, do they currently have that right? It is hard to argue that the Reverse Mortgage Stability Act (RMSA) of 2013 grants that power to HUD. There is little way anyone can demonstrate that the actuarial findings for the program would change for the better by simply carving out the HECM portion of the MMI Fund. That is a matter for Congress and the President.

        We are looking for direction on what should be done with the HECM portion of the MMI Fund, if anything at all. In your analogy that seems to be something that must come down as a directive “from Congress and the President.”

  • Wow, what a great back and forth discussion!

    I read all the comments and frankly, I have to agree with both The_Cynic and Jim Veale.

    2 X 2 = 4, any way you look at it, The_Cynic and Jim Veale both came out with 4 in my opinion. There is not much more I can add to the statistical data they provided!

    REVGUYJIM, Ed McSherry and RMAdvisor, all fought your positions well. I think RMAdvisor sided more with The_Cynic and Jim Veale as I did but in closing, I would say this was a very healthy discussion among the real professionals in our industry.

    I will say this, none of us have a Chrystal Ball, we don’t know what the future will truly bring. We can only hope that Ben Carson has the right intentions, long term for the HECM. We in the industry can only express our opinions, try and influence but, politics are politics!

    I have to remain optimistic, go out there and find the business that is available to us, which there is plenty. I have been looking at our industry completely different from ever before, I am planning new strategies and going after a complete new market, which is now available to us my friends!

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

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