The Government Accountability Office took a deep dive into benefits and drawbacks of including federally backed reverse mortgages in the Mutual Mortgage Insurance Fund, laying out a variety of alternatives that Congress could explore.
After the most recent actuarial report from the Federal Housing Administration revealed a negative value of $14.5 million for the Home Equity Conversion Mortgage portfolio, a variety of voices — including the Urban Institute and Mortgage Bankers Association president David Stevens — renewed a call to put the reverse mortgages back into a separate fund.
But the GAO, in a wide-ranging analysis of the FHA’s capital requirements and stress testing practices released Monday, outlined some reasons why it should stay put. For instance, critics of including the loans in the overall fund have pointed out that HECMs tend to be more sensitive to changes in interest rates and overall economic trends, thus skewing the overall performance of the larger, more stable forward portfolio.
But that variability could also make it hard to enforce a capital ratio; under current rules, the combined forward and HECM program must maintain a capital ratio of 2%.
“As a result, the capital ratio for the HECM portfolio is more volatile, and requiring HECMs to independently meet a capital ratio would be difficult,” the GAO pointed out. “Specifically, it could be difficult to manage HECM insurance premiums, loan limits, and other program requirements to ensure that a capital requirement is consistently met.”
By lumping them together as a single unit, the FHA allows forward the portfolio to serve as a moderating force on the reverse portfolio, the GAO said, fostering overall stability. This extends to risk mitigation: Because cash flow for the two programs changes over time, keeping them as a single unit could end up in lower overall capital needs than would be incurred by two separate funds.
Still, the GAO makes some of the same points as those who support removing HECMs, including the overall volatility they bring to the fund, the way the combined capital ratio number could obscure the health of the individual portfolios, and the creation of scenarios in which one loan type “bails out” the other. The latter rings especially true in the reverse mortgage space: The FHA and the Department of Housing and Urban Development specifically cited bleak actuarial numbers when lowering principal limit factors in October, with officials saying HECMs were interfering with HUD’s primary objective of fostering homeownership among younger, lower-income borrowers.
“In certain circumstances, the joint capital assessment could create pressure to raise insurance premiums or tighten underwriting standards in one program to compensate for the weaker financial performance of another program,” the GAO wrote, describing a scenario in which poor HECM performance leads FHA to increase forward mortgage premiums.
“While this situation would benefit HECM borrowers (because their insurance premiums would not increase), it would potentially create a burden for forward mortgage borrowers and could reduce the number of prospective borrowers who are able to afford FHA mortgage insurance,” the GAO noted.
The GAO stopped short of making specific policy suggestions for how to solve the issue, but laid out a variety of options that Congress could take. For instance, the GAO described a scenario in which the HECM fund was held to a different capital ratio standard than forward mortgages, either in the MMI or in a separate fund. While this would eliminate the problem of one loan program propping up the other, the GAO notes that Congress would likely need to hold the HECM to a higher capital ratio standard — which could require even lower lending limits.
On the flip side, Congress could exempt HECMs from the capital requirement entirely and make the program even more of a specialized benefit for seniors.
“As with a separate HECM capital requirement, this option would help ensure that the financial condition of future loan cohorts in the forward mortgage portfolio is not masked by a combined capital ratio,” the report reads. “But the financial condition of the HECM portfolio would not be as transparent, unless FHA continued to conduct HECM actuarial assessments.”
The GAO did offer firm recommendations to the FHA about including fund-wise stress tests on the MMI; the FHA listened and performed these analyses for its fiscal 2017 report to Congress.
Read the full report at the GAO.
Written by Alex Spanko