Carson: Reverse Mortgage Changes Have Helped Fight ‘Disaster’ in Program

Recent changes to the reverse mortgage program are helping to ease the strain on the Mutual Mortgage Insurance Fund, Department of Housing and Urban Development Secretary Ben Carson told Congress on Tuesday.

“I think it has largely stemmed the tide in terms of the disaster that was occurring there,” Carson said during testimony before the House Appropriations Subcommittee on Transportation, Housing, and Urban Development. “But we were draining from the MMIF $12.5 billion over a nine-year period. That was ridiculous.”

The secretary was responding to a line of questioning from Rep. Mario Diaz-Balart, a Florida Republican who cited recent statistics showing a significant increase in Home Equity Conversion Mortgage foreclosures and defaults.

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“I’m frankly a little concerned about that program, and I want to work with you to dive into it and make sure that our seniors are protected,” Diaz-Balart, who represents the Miami suburbs, said during the hearing. “I’m not sure if those default rates or actually accurate or not. Supposedly there are huge numbers of seniors defaulting, which is obviously something that is unacceptable. Those are folks that have to be protected.”

Carson validated the representative’s concerns.

“The people who put the program together had very good intentions, but they didn’t put it together very well, so we inherited a mess,” he said.

HUD officials specifically cited the drains on the MMI Fund when introducing lower principal limit factors and updated mortgage insurance premiums last fall. At the time, the most recent actuarial report showed that the HECM program had an economic value of negative $7.7 billion; later in the year, the fiscal 2017 report showed that number had ballooned to negative $14.5 billion.

The secretary did not specifically indicate the origin of the $12.5 billion number he mentioned in his testimony, but the fiscal 2016 actuarial report estimated the future economic value of the HECM portion of the MMI Fund to be $12.5 billion by fiscal 2023.

Though the new rules went into effect for loans with case numbers assigned on or after October 2 of last year, Carson indicated that the updates were already bearing fruit.

“We understand the problem and are dealing with it very effectively,” he said.

There has been some controversy in the industry over the validity of the foreclosure numbers that Diaz-Balart referenced. Last November, a pair of nonprofits released the results of a Freedom of Information Act (FOIA) request that showed HECM foreclosures spiking 646% in 2016.

But National Reverse Mortgage Lenders Association president and CEO Peter Bell said the vast majority of foreclosures consist of property transfers initiated upon the death of the last remaining borrower, and not situations in which living seniors are being evicted from their homes. In addition, Bell pointed to new guidance from HUD as a reason for any increase in tax-and-insurance defaults.

“The number of tax and insurance default foreclosures rose dramatically after HUD enforced policies to call those loans due and payable,” Bell told RMD in a statement in February, chalking up the perceived foreclosure surge to “misleading data analysis.”

Other issues

Carson appeared before the committee to discuss the fiscal year 2019 HUD budget, which the Trump administration has sought to cut substantially. Still, Carson laid out plans to completely overhaul the department’s information technology structure, funded in part by a new $25-per-loan fee assessed to all Federal Housing Administration lenders.

“We have to get the IT systems at FHA up to par. We are putting a lot of money and a lot of people in jeopardy by continuing this,” Carson said of the department’s aging computer systems, which costs hundreds of millions of dollars a year to simply patch.

HUD’s systems withstand 2,000 to 3,000 hacking attempts per week, Carson told the subcommittee, further driving the need for a unified, modern internal system.

The secretary also faced questioning over his office’s purchase of a $31,000 dining room set, which he cancelled after a public backlash. He continued to deny foreknowledge of the outlay, despite reporting that asserted the contrary, and reiterated that he had little interest in lavish furnishings.

“I’m not really big into decorating. If it was up to me, my office would probably look like a hospital waiting room,” Carson said.

Carson additionally blamed a lack of support staff on the failure of internal spending controls, and pointed to HUD’s recently announced push to cut down on waste and improve its spending processes.

Written by Alex Spanko

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  • The real problem with the foreclosure information the public views is that it is not classified by what caused the first default on the HECM that resulted in foreclosure. Sometimes there can be more then one default between the date of the default that actually resulted in the foreclosure and the date of the foreclosure itself. If that classification were part of the reports given to the public by HUD, the situation would be far easier to explain.

  • Although I strongly support Dr. Carson, his command of the HECM program needs improvement if he is to be without a FHA Commissioner much longer. Since former FHA Commissioner Montgomery served for awhile in the Obama Administration, it is disgraceful that Democratic Senators will not approve his appointment.

    Senator Elizabeth Mann (most know her as Warren, the last name of her first husband) is holding up the nomination. Her stance is ridiculous and without merit. He was good for HUD under the Bush and Obama Administrations and understands the mortgage market which seems to intimidate the Senator. I wish there had been as much concern about the appointment of former FHA Commissioner Galante.

  • I fail to see how the October 2nd changes “stemmed the tide in terms of the disaster that was occurring there”. The new MIP coming in the door will do nothing to stem the tide that will continue until all older loans (pre-April 2013 loans) pay off, particularly in the states with lower appreciation. If Dr. Carson wants to make the argument that the new pool of loans, post October 2nd are safer for the fund, I can agree with that.

    I still would like to see the annual cash flow of every dollar generated by HECMs vs. paid out back to the early 2000’s. Pipe dream, I know.

  • Both George Owens and Jim Veal bring up some very good points about the article.

    However, the article jumps from foreclosures to the condition of the MMI fund. Yes, they are both related to one another. We need to realize that the foreclosure issue is not the creation of the October 2nd ruling, in fact let me take you back before April of 2015!

    Before financial assessment (FA) went into effect we had many, many loans made to those borrowers that would not have qualified if FA was in existence. Many of these loans were made 5 and 10 years before FA went into effect!

    A lot of those borrowers took out the RM, paid off their existing liens and put money away in a line of credit for future unknown occurrences!

    However, many of those borrowers found themselves having to live off their line of credit. Consequently, when the line of credit ran out, borrowers found themselves not having enough funds to pay for their taxes and insurance when they came due!

    In short, believe it or not, we have been faced with a great deal of foreclosures today created by the problems stemming from the past.

    The MMI fund disparities and deficiencies will go away in time, primarily because of the FA ruling creation and the new ruling of October 2nd, 2017.

    Once we face up to what the cause is and was, we hopefully can deal with it and accept it! At the same time, we can focus on making the HECM of today work for us and our senior homeowners!

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

    • John,

      Thank you for your compliment.

      We do not agree on financial assessment, however. Let us look at one theoretical situation. If a borrower saw the value of his home go up six percent each year for three years and his effective average HECM note interest rate was 5.9% with a 0.5% ongoing MIP rate and home appraised at $400,000 for the HECM and a $200,000 balance due at closing what is the likelihood that a foreclosure due to a default for failure to pay insurance and taxes will result in a loss for the MMI Fund?

      First the value of the home at foreclosure is $476,400 and the balance due on the HECM is $242,210. So where is the loss to either the lender or the MMI Fund. Selling the home even with $150,000 in foreclosure and selling costs would still produce cash inflow to the borrower of over $84,000. By the way $150,000 in costs is way too high. While your discussion of loans endorsed in fiscal 2005 is interesting, what does it have to do with the MMI Fund? In fact most of your HECMs you discuss as running out proceeds pertain to fixed rate HECMs and hardly any to adjustable rate HECMs. Then again HECMs endorsed before 2009 were not even eligible to be in the MMI Fund.

      It really is unlikely that HECMs endorsed after fiscal 2008 had that many defaults from taxes and insurance that resulted in foreclosure losses. Remember taxes and insurance must be prepaid for the first year before a HECM can be endorsed.

      So to say the least I have a hard time imagining how financial assessment will do much for losses in the MMI Fund at all since financial assessment will do little to stop foreclosure losses when the borrower closed without a LESA and the borrower runs out of cash five years or later down the road. Financial assessment only impacts HECM applicants who show current issues, not those that will possibly pop up five, ten, or thirty years from now. Financial assessment seems to be far less valuable in detecting future cash flow problems that result from unknown life events today than you indicate.

      While your position attempts to appease the anger over financial assessment, it has little application other than in anecdotes about improbable outcomes when it comes to the current loss problems in the MMI Fund.

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