When Ben Carson expressed support for removing the reverse mortgage program from the Mutual Mortgage Insurance Fund before Congress last week, he became the most prominent voice in a growing call within the industry.
“I think the secretary is very astute on the subject, and separating it out from the MMI fund would certainly allow for better policymaking overall,” Mortgage Bankers Association president and CEO David Stevens told RMD in an interview.
Including the Home Equity Conversion Mortgage in the MMI fund puts the program — along with the Federal Housing Administration’s larger mortgage portfolio — in a difficult position, Stevens said.
While serving as FHA commissioner, Stevens said the arrival of the annual actuarial report in the fall was always a source of anxiety.
“The extent of the volatility each year was just mind-numbing, because you were literally biting your nails before the November release, wondering how bad the HECM program [was],” Stevens said. “What’s it going to do to the fund this year? It’s a pure tossup.”
The Department of Housing and Urban Development pointed to the latest actuarial report, which assigned a value of negative $7.7 billion for HECMs during fiscal 2016, as a primary reason for introducing tighter principal limit factors and restructured mortgage insurance premiums earlier this month; without a change, HUD officials said, the department would need to ask the Treasury Department for a bailout amid the significant HECM drag.
But Stevens pointed to the immense volatility in the fund over the last few years: Between 2015 and 2016 alone, the value swung from positive $6.8 billion to that negative $7.7 billion figure. That’s because, Stevens said, the HECM program is far more susceptible to the three specific modeling changes that the independent actuarial firm incorporates into its analysis every year: interest rates, home price forecasts, and life expectancy.
Because the loan interest is constantly added to the balance of a HECM, changes in the projections for interest rates have an outsized impact on reverse products. Adjustments to home price forecasts naturally impacts how much money the actuaries assume borrowers will be able to access in the future, while life expectancy increases pose a significant risk to the fund, since they boost the chances that a homeowner can stick around long enough for the loan to outstrip the value of the house.
“For all those reasons, you end up producing incredible volatility,” Stevens said.
The MBA president isn’t alone. Laurie Goodman, a researcher at the Urban Institute, has long lobbied to remove the HECM from the MMI fund.
“I think they shouldn’t be in the MMI fund,” Goodman told RMD last month. “They have a degree of volatility, due to interest rate changes, that doesn’t really reflect what the MMI fund is trying to measure.”
And now the plan has an advocate in Carson, who stated his support last Thursday in response to a question from Rep. Denny Heck. The Washington Democrat had expressed interest in either moving the reverse mortgage program out of the MMI fund or changing the assumptions to smooth out volatility, and asked the secretary for his thoughts.
“I think that’s a very worthy thing to pursue,” Carson said. “We’re looking at, just over the last year, $7.7 billion out of the MMI because of HECM.”
For the HECM program, the danger lies in the fact that the MMI fund must maintain a capital ratio of 2% under federal law — the only such requirement for government funds, Stevens said. That’s why the MBA president recommends shifting the HECM back into its former home, the General Insurance and Special Risk Insurance Fund, which is not subject to Congressionally-mandated capital ratios. Brian Montgomery, currently President Trump’s pick for FHA commissioner, has expressed support for this solution in the past as well.
Freed from year-to-year volatility, policymakers can focus on other ways to shore up the HECM program, which Stevens classified as a necessary social program akin to Veterans Affairs initiatives. For the people who entered the reverse mortgage program to help seniors, Stevens said, steps to stabilize the HECM from the government’s perspective should be a top priority.
“I think all of that group should be working to find the best way to make the program sustainable for the long term,” Stevens said. “I think if we can get it out of the MMI fund, it would allow for more patient work.”
Written by Alex Spanko