Think Tank Predicts Sunnier Reverse Mortgage Reports to Come

Citing the inherent differences between the government-backed forward and reverse portfolios, researchers at the Urban Institute again called for the removal of the Home Equity Conversion Mortgage from the Mutual Mortgage Insurance Fund — but also predicted better results for the HECM fund in coming years.

“The programs have different risk characteristics and missions,” researchers Edward Golding and Laurie Goodman wrote in a report released Wednesday. “Lumping them together distorts their financial performance, interfering with policymakers’ ability to make sound decisions.”

The call comes on the heels of another gloomy actuarial report for the MMI, which pegged the HECM program’s economic value at negative $14.5 billion. But for a variety of reasons, Golding and Goodman say that classification is inexact, and see more upbeat results in the near future.

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For instance, they noted that the actuarial report uses significantly outdated HECM claims data which still has not yet caught up with the previous principal limit factor decrease in 2013. That also means that the effects of the Financial Assessment restrictions, rolled out in 2015, aren’t incorporated into the analysis, either. Pointing to a recent study from Fannie Mae and Kansas State University, Golding and Goodman  posit that FA could help cut fund losses by 32%.

The researchers also make a point that Goodman has expressed multiple times in the past: Projecting the performance of reverse mortgage loans is substantially more difficult to accomplish accurately than with the forward program. The actuaries have to use data to estimate how long the loans will remain active, the eventual sale price of the home, and interest rates over a considerable periods of time.

“The variability of interest rates raises one of the biggest challenges to making accurate HECM performance predictions,” the pair wrote. “Because a HECM borrower takes out a long-term loan secured by the property’s value, and many of these loans have a fixed interest rate, the value of that loan falls as rates rise, and rates fall as the HECM loan value rises.”

A call for removal

Based on those factors, the HECM program’s value and capital ratio have fluctuated significantly over time, muddying the true health of the products, according to Golding and Goodman.

That’s why the pair calls on Congress to shift the HECM portfolio out of the MMI, and also create a separate group for HECMs originated prior to 2016 to provide a clearer picture of the post-Financial Assessment loan landscape.

“Lumping the HECM and the forward products together distort decision-making for both programs,” they concluded. “Given the importance of HECMs in allowing seniors to age in place, the pre-2016 vintages should also be removed from the HECM MMI Fund, as the current HECM program has been dramatically improved, and past deficiencies shouldn’t hinder it going forward.”

Read the Urban Institute’s full analysis on the Urban Wire.

Written by Alex Spanko

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  • WARNING: the post above is based on many misconceptions!! Neither its author nor the acclaimed researchers understood the difference of the function of the actuaries in performing their engagement for fiscal 2017 and the function of the actuaries in performing the engagement for fiscal 2016.

    The following quotation reflects but one of the major misconceptions about the Actuarial REVIEW for fiscal 2017: “The call comes on the heels of another gloomy actuarial report for the MMI, which pegged the HECM program’s economic value at negative $14.5 billion.” That statement is both false and very misleading. Nowhere in the Actuarial Review (not report) do the actuaries provide that number in their 2017 review, period.

    The actuaries never tell us what the net present value of the projected cash flows from the HECMs in the MMI Fund were as of 9/30/2017 from which the economic value of the HECM portion of the MMI is derived by FHA ONLY. Rather the actuaries tell us that based on the results of their calculation and estimates, the net present value of the projected cash flows for the HECMs in the MMI Fund used by FHA in its annual report to Congress on the financial status of the MMI Fund for fiscal 2017 is reasonable. See page 2 of the Actuarial Review on HECMs in the MMI Fund for fiscal 2017 which states: “The Cash Flow NPV estimate provided by FHA to be used in the FHA’s Annual Report to Congress is negative $15.5 billion. Based on Pinnacle’s ACE and range of reasonable estimates, we conclude that the FHA estimate of Cash Flow NPV is reasonable.”

    Second, the economic value provided by the actuaries in the past and by FHA exclusively for fiscal 2017 is NEVER the value of the HECM program as a whole but always the HECM portion of the MMI Fund. Remember there is still a huge number of HECMs still accounted for in the G&SRI Fund that are included in the economic value of the HECM portion of the MMI Fund.

    So what does it matter if “… the actuarial report uses significantly outdated HECM claims data which still has not yet caught up with the previous principal limit factor decrease in 2013,” and “…the effects of the Financial Assessment restrictions, rolled out in 2015, aren’t incorporated into the analysis?” The actuarial review (again NOT report) for fiscal 2017 on HECMs in the MMI Fund only concludes that the net present value of the projected cash flows from the HECMs in the MMI Fund as of 9/30/2017 as determined by FHA (which was a negative $15.5 billion) was reasonable.

    Since it is clear that it is only the FHA numbers that are used in the annual report to Congress then it is the FHA determined numbers which must be analyzed. The researchers are just wasting everyone’s time by focusing ANY time on the Actuarial Review.

  • My comment is simple, removal of the Home Equity Conversion Mortgage from the Mutual Mortgage
    Insurance Fund makes the most logical sense!

    Let the HECM stand on its own! One thing is for sure, by allowing it to stand on its own, we will find out for sure if the HECM was the culprit or the Hero!

    My money is on the HECM being the hero!!

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

    • John,

      It all depends on who is defining hero and how being a hero is being defined. Remember you thought Dodd-Frank was dead and it is part of the law land.

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