One of the anecdotes circulating around the industry is that a Department of Housing and Urban and Development employee is claiming that reverse mortgage losses in the Mutual Mortgage Insurance Fund (MMIF) will drop if volume goes up.
The logic is that the higher the endorsements, the more mortgage insurance premiums (MIPs) there will be to offset losses. The following two charts — one graph, and one table — provide a quick means to grasp certain numeric information contained in the HUD Annual Report to Congress regarding the financial status of the Federal Housing Administration MMIF for fiscal 2017, dated November 15, 2017 — also known as the Fiscal Year 2017 Annual Report. This is crucial to understanding important points related to this anecdote.
Chart 1 shows HECM losses in the MMIF by cohort of HECMs endorsed in the same fiscal year. The losses for the HECMs endorsed in fiscal 2009 is by far the largest. As seen in this graph, the largest number of HECMs endorsed in any fiscal year reflected in the MMIF is also fiscal 2009. Fiscal 2014 resulted in the second lowest endorsements of any fiscal year in the MMIF, along with the smallest loss for any fiscal year.
What the combination of Chart 1 plus the graph presents is that as HECM endorsements increase, so do the losses, except in fiscal 2016. Fiscal 2016 has the lowest cohort of HECM endorsements in the MMIF so far but it has the third lowest losses, a clear anomaly. Yet there is no pattern that indicates HECM losses go down when HECM endorsements increase.
Chart 2 shows the average MMIF loss per HECM by fiscal year endorsed. For the first five fiscal years, 2009 to 2013, the average loss was within a limited range of $25,748 to $28,319. In that five-year period, fiscal 2009 had the largest number of endorsements and the highest average loss per HECM followed by fiscal 2010 with the second highest number of HECM endorsements — along with the second largest loss per HECM.
In the latest four fiscal years, the pattern in the average loss per HECM shows a much different result than for the first five. First the range goes from a $14,000 average loss per HECM to a $35,447 average loss per HECM. The average loss per HECM in that four-year period rose substantially each fiscal year. The MMIF average loss per HECM for fiscal 2014 was almost half of what it was in fiscal 2013 (50.9%), but endorsements only fell by 14.1%. Then in fiscal 2016, endorsements fell by 15.78% but the average MMIF loss per HECM rose by 34.1% once again demonstrating the anomaly that took place in fiscal 2016. Fiscal 2017 endorsements rose by 13.1% but the MMIF loss per HECM rose 30.3%.
Some might want to argue that theoretically higher volume reduces the per unit cost of the fixed costs of the HECM program; thus losses should go down as volume rises. First, all costs of the HECM program, other than lender loss reimbursements and certain costs in assignment, are paid from annual Congressional appropriations. The only HECM costs of the MMIF are variable. This structure is the reason why the HECM program could never be self-sustaining.
Again, there is no evidence in the last nine-year period that when endorsements rise during a fiscal year, the related MMIF loss for a fiscal year will decrease. Until otherwise demonstrated, that theory is mere myth.
Only FHA/HUD data presented
The best public source of information for understanding the financial issues currently facing the MMIF is the AR (Fiscal Year 2017 Annual Report). Page 7 of the AR tells us how the function of the actuary has changed for fiscal 2017 as follows: “This year, the independent actuary was responsible for providing an independent assessment and opinion regarding the reasonableness of FHA’s Cash Flow NPV estimate, in contrast to prior years when a financial engineering firm produced the baseline estimates, which were validated for reasonableness by an independent actuary.” As a result, only information provided by FHA/HUD in the AR is being presented.
Something new, stand-alone reporting
Starting at the bottom of Page 5 of last fiscal year’s Annual Report, HUD claims: “New Stand-Alone Reporting on Home Equity Conversion Mortgages (HECMs) and Forwards Provide Fiscal Insights—… on the fiscal condition of the MMIF by estimating ‘stand-alone’ … cumulative contributions of each program to the MMIF since HECMs became part of the MMIF starting with new endorsements in FY 2009.” This one correction to eight years of improper reporting is crucial to comparing financial data from one fiscal year to another.
The charts and table in this article are reliable in that they are free of any data related to the forward mortgage portfolio of the MMI Fund, as the last administration mingled freely in with the HECM portion of the MMIF reports as if it was proper financial reporting — which it is not. The financial information in last fiscal year’s AR is reported on a stand-alone basis and represents a fresh look at the loss position for each fiscal year of HECM endorsement in the MMIF HECM portfolio as of September 30, 2017.
Part 2 of this series
Part 2 will look at why financial assessment necessitated at least part of Mortgagee Letter 2017-12, which ushered in the October 2 principal limit factor cuts and new mortgage insurance premium structure.