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.
For instance, they noted that the actuarial report uses significantly outdated HECM claims data which still has not yet caught up with the previous principal limit factor decrease in 2013.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