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HUD: Reverse Mortgage Program Continues to Drag on Insurance Fund

The federally backed reverse mortgage program continued to hamper the health of the overall Federal Housing Administration insurance fund, posting an economic value of negative $14.5 billion in fiscal year 2017.

That drag was the primary reason for an overall decline in the capital ratio for the Mutual Mortgage Insurance Fund (MMI), Department of Housing and Urban Development officials said Wednesday morning after the release of the annual FHA report to Congress.

The overall capital reserve ratio fell to 2.09%, above the statutory minimum of 2% but down from the 2.35% recorded in fiscal 2016 — all this despite a strong housing market and economy, as well as a 13% increase in overall Home Equity Conversion Mortgage endorsements.

“It’s fair to ask why there would be a decline in these indicators,” HUD senior advisor Adolfo Marzol said. “The answer is the HECM program.”

For the first time, HUD provided two completely separate values for the HECM program and the forward mortgage portfolio, part of HUD’s overall new commitment to transparency and accuracy, according to Marzol. These analyses found a 3.33% increase in capital ratio for the standalone forward program, with a $38.4 billion positive economic net worth for fiscal 2017.

The HECM, meanwhile, had a standalone capital ratio of negative 19.84% and an economic net worth of negative $14.5 billion — a number that was slightly worse than the negative $14.2 billion in projected cash flow net present value reported by the department yesterday.

Marzol, along with general assistant secretary for HUD’s Office of Housing Dana Wade, said the results validated the department’s decision to lower principal limit factors and adjust mortgage insurance premiums beginning October 2.

“The HECM program has been a substantial net economic drain on the MMI fund, which is why we made these changes,” Wade said.

The Financial Assessment requirements enacted in 2015 helped reduce delinquencies related to tax-and-insurance defaults, Marzol said, but weren’t enough to stanch the bleeding.

“The bottom line is, based on where we are today, those changes have been insufficient,” he said. “That was certainly our assessment back this summer, and motivated and drove the changes that were implemented in October.”

As for the potential for further changes to stabilize the program, Marzol said the department remains in “monitoring mode” over the most recent program updates, noting that they still have few data points to assess the full impact of the lower PLFs.

“We are in a position now of needing to monitor how those changes are impacting the new endorsements coming in, and obviously, we’ll continue to monitor the portfolio closely,” he said.

Those comments echoed a written statement from HUD secretary Ben Carson introducing the report.

“Because HECM is a historically volatile program, it will continue to require close scrutiny,” Carson wrote.

Part of the drain also came from the rise in adjustable-rate HECMs, which are more sensitive to changes in interest rates: Because interest rates are predicted to rise over in the short term, Marzol said, the ARM concentration led to increased risk to the fund over time.

Industry reactions

The report to Congress proves that the HECM should be removed from the MMI entirely, Mortgage Bankers Association president and CEO David Stevens said shortly after the data was released.

“Today’s report further reinforces the need for policymakers and Congress to seriously consider whether or not the HECM program should be included in the MMI fund going forward,” Stevens said in a statement. “Removing it would strengthen the MMI fund, give a more accurate look at the health of FHA’s forward book of business and could allow for the consideration of a mortgage insurance premium reduction.”

The National Reverse Mortgage Lenders Association also released a statement, saying leadership shared Carson’s optimism that the post-October 2 changes would help shore up the HECM program; in the introduction, the secretary wrote that the moves represented “decisive action to place it on a more fiscally sound path for new endorsements.”

“We are still studying FHA’s actuarial report to Congress to understand how the actuaries have modeled the projected valuation of the HECM portfolio,” NRMLA said in its statement. “In the past, we’ve raised concerns that actuaries misunderstood the behavior of a HECM loan over time — including how a loan is typically serviced and the home’s value at time of disposition. ”

“Moving forward, we support an effort to study whether the HECM program should remain in the MMI fund, or if it should be separated into its own mortgage insurance fund where it can be evaluated on its own,” the statement continued. “This is a conversation we will be having with policymakers at the agency and on Capitol Hill, and with industry stakeholders.”

Written by Alex Spanko