FHA in “Fix-It Mode,” Stresses Commitment to Reverse Mortgages

After substantial Home Equity Conversion Mortgage program changes implemented last year, the Federal Housing Administration (FHA) doing “triage” to assess, manage and improve the agency’s reverse mortgage loan portfolio.

Having held roughly a month at the helm of the FHA, Commissioner Brian Montgomery says the agency is strongly focused on maintaining the health of the agency’s insurance fund, and its reverse mortgage program in particular.

In a call with members of the press Tuesday, Montgomery expressed concerns about the FHA’s technology backbone, the administration’s market share of the nation’s single-family mortgages, and the HECM program, which he noted has led to a negative $14.5 billion strain on the Mutual Mortgage Insurance (MMI) Fund, according to recent annual actuarial reviews.

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But the program itself has value, he said, for seniors to age in place, and the agency is currently in “fix-it mode” to help right the program.

“We are digging deep in the portfolio to find out of the problem is on the front end or the back end,” Montgomery said. “My sense is that it’s more on the back end in terms of the losses we are experiencing. Part of ‘triaging’ is [determining] why that is happening.”

Program fixes, past and future

The commissioner was confirmed by the Senate in May after being appointed by President Trump in September and previously serving as FHA commissioner under the George W. Bush Administration from 2005 to 2009. He since has served as vice president of the Collingwood Group, a Washington, D.C.-based advisory firm, which was acquired by real estate strategy and tech company Situs in 2017. As in his previous role leading the FHA, he maintains his commitment to reverse mortgages and fixing the program, he said.

“I have been a strong advocate of the reverse mortgage program,” he said, noting the lack of government assistance for senior homeowners who face income challenges. “This program allows seniors to age in place, which they want to do. It’s the best kind of program [in that it offers] assistance you pay for yourself…It’s up to us to fix it for the long term.”

Recent program changes, including a reduction in principal limit factors (PLFs) for most borrowers and insurance premium change implemented in October, however, have cut deeply into reverse mortgage volume, according to recent reports. Based on June data from the Department of Housing and Urban Development, analysts at Reverse Market Insight reported that with monthly volume at 2,838 loans, that tally has fallen to a level not seen since 2005.

Further changes to the FHA’s reverse mortgage program could be coming but the agency is sensitive to how they could impact the market and availability of the product, Montgomery said.

“We need to find that tipping point,” he said. “If you make further changes to [principal limit factors], pricing changes, what is the tipping point to where volume drops, and there are impacts to the [HECM mortgage-backed securities]. I am very mindful of that, but looking at the back end of the process, once the loans are assigned to HUD is the area we are focused on. I am not sure further [principal limit] cuts are going to fix that problem.”

Home Values Under the Microscope

One area the FHA will be examining with respect to reverse mortgages is appraisals. After examining the HECM portfolio under Montgomery’s leadership to date, appraisals have emerged as an area of concern.

While not expressing an opinion, Montgomery explained that because HECM properties tend to depreciate more than average properties, inflated appraisals among those properties can lead to twice the “pain” for FHA.

“We are doing heavy triage on the forward book and on the reverse book,” he said. “We have spent considerable time in the last few days ‘triaging’ the HECM portfolio looking for deficiencies and areas of concern. There is one area in particular we are going to hone in on. That is appraisals.”

The agency plans to compare existing appraisals with Automated Valuation Model estimates (AVMs) as a means toward that goal, both for forward and reverse mortgage loans in the agency’s portfolio.

Rebuilding a private market

In recent months, the reverse mortgage industry learned about several new private product launches, as well as a shift among the private product offered by Finance of America Reverse (FAR). Not designed to be a 100% market player, the FHA welcomes the prospect of new private products, Montgomery said.

“I don’t think it was ever envisioned to be 100% of the market,” he said of the HECM product. “I think folks would like to see that expand; I would like to see the market expand. There are some proprietary products out there, but we pretty much dominate the market right now.”

Quipping that it has been a very busy 32 days at the helm of the FHA, Montgomery pointed to a bright future for expanding homeownership and improving operations at HUD—particularly with respect to the agency’s technology infrastructure. FHA plans to hire substantially in the coming months toward that effort, as well as target possible collaborations and economies of scale with other agencies.

“It’s not necessarily wanting to expand market share,” he said. “But if we are going to be there for generations to come, we have to address technology and I will do everything I can to fix that.”

Written by Elizabeth Ecker

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  • So let us see, PLFs will not go down but appraisals will be looked at more harshly. Does it matter it is the PLFs that go down or ye olde FHA haircut to the appraised value? Either change reduces principal limits, the real problem in the calculation.

    It is good to see that RMI is finally talking about June 2018. I still do not understand how on 6/6/2018, they can say April 2018 was most likely the bottom for HECM endorsements and then 24 days later HUD tell us endorsements fell by over 15% from the April 2018 endorsement level.

  • Thank goodness we have Brian Montgomery in charge again. His comments were refreshing to read and just what I needed to hear. Those of us that would like to plan out our next twelve months need to have an idea of where we are headed, and I think he just clarified that for now. I’ll keep my fingers crossed that the actuarial report isn’t overly negative in it’s assumptions.

    I’m still confused about this talk of potential appraisal fraud. Are there a bunch of lenders forcing appraisals through an AMC that they own? Otherwise, I see this as an appraiser competency issue, and that’s not something that lenders have any control over.

  • Well I am glad to see Brian speak out on the program and our industry, it will be very interesting to hear more about what he finds out and plans to do. Also glad to hear him say that more cuts might not be the answer! But his remarks regarding appraisals is concerning, I do not believe they are at all “Inflated”, in some cases quite the opposite. I absolutely believe that in my market, Southern California, they are conservative to spot on in value. Since the AMC’s have come on board I VERY rarely see a generous home value! Unless they have severely enhanced the AVM system I do not think this is a good rout to go. But like everything else here and out there, this is just my opinion.

    • I agree. In my experience with an original HECM, and backed-up by the general consensus of those I’ve talked to in the industry, HUD-HEMC appraisals were notoriously undervalued around the +/- 2014 time frame; this situation was generally attributed to a reaction to the “Financial Crisis.”

      It was a problem then. Articles on the subject indicated that borrowers were pretty much across the board
      not satisfied with their appraisals (discounting the fact that “no one’s ever satisfied with their appraisal,” this was well beyond “the usual”).

      In 2014, I had a HUD appraisal that came in at, what I considered, 50k undervalued. Upon a refi in 2016, a very knowledgeable HEMC-counselor told me that, since 2014, the HUD appraisals-situation had corrected itself. I found that that was the case, and my collection of 10 close-comparables were exactly in line with my HUD-appraisal expectation: these “sold-comparables” prices that I used matched the bottom line of the HUD-appraisal.

      Quote from the article:
      “While not expressing an opinion, Montgomery explained that because HECM properties tend to depreciate more than average properties, inflated appraisals among those properties can lead to twice the “pain” for FHA.” -END QUOTE-

      Although my experience is within “the Boston area,” specifically, if the “appraisal problem” has positively adjusted itself, nationally, it’s not broke, so don’t fix it.

      The FHA may be confusing the fact that, in general, HECM-homes depreciate at a faster rate than forward mortgaged homes, with the effect of HECM, HUD-initial-appraisals.

      If my assessment that HUD appraisals are currently being done in an accurate way is true, then Mr. Montgomery’s comment: “…that because HECM properties tend to depreciate more than average properties, inflated appraisals among those properties can lead to twice the “pain” for FHA,” wouldn’t be true.

      Unless he’s saying that because HECM homes can be anticipated to disproportionately depreciate over time, the initial HUD appraisal should be deliberately, especially lower than appropriate in order to “make-up” for that unwanted discrepancy. In that case, it would be blatantly unfair to those HECM-homeowners who conscientiously maintain their properties.

      This seems to be in a similar tone on top of Secretary Carson’s comments to congress (paraphrase): Lowering the PLF is a good idea, because senior borrowers were getting too much cash out of the deal in the first place.

      Call it biased but, it seems that concentrating more on making the HECM an attractive program for seniors, and therefore creating more originations is “the way to go,” They’re not going to can-kick the insurance fund deficit away. It has never worked, and never will.

      If they can bail-out Wall Street, bail-out the seniors for a change. Write-off those billions and start over with, yes, the “Financial Assessment” (which hasn’t been in effect long enough to assess it’s benefit, but the plain logic of it is compelling), and restored or even enhanced PLF.

      Start again, only with full-weight given to the recommendations of those who work in the industry this time. If you want to build a bridge, you don’t ask around the bureaucracy-office for “who wants to do it,” you ask those who have built bridges to build the bridge.

  • Glad to see an FHA commisioner that appreciates the role and relationship of the secondary market to origination. Because of the nature of Ginnie Mae HMBS there has to be a critical mass of loans in the pools and a certain age distribution in order for the pools to be sustained. It seems from the article that one of the biggest concerns to the FHA reverse portfolio are assigments since at that point the Max claim amount has been paid out of the fund and no further periodic charges come in for those loans and the potential loss at the loan level is all on the MMI fund. I had pointed this out back in 2009 and 2010. Furthermore these are the most seasoned loans and due to the advanced age of the borrowers in these case, there is a higher probability the collateral has not been a well mantained as other properties for sale by non reverse borrowers and thus there may be a lack of willingness by buyers to even bid an offer that meets shortage created by the loan balance during the foreclosure sale. Now, the unintended consequence of doing haircuts to appraisals is that in fact the cross over point to assigment to HUD is accelerated, potentially increasing the rate of loans balances reaching 98% of MCA which was the very issue that Mongomery was addressing. Lowering PLF on the other hand delays the cross over point and this hurts volume and eligibility. My personal opinion is for FHA to focus on the efficiency and due dilligenge of the servicer’s loss mitigation/REO departments in making sure the required min maintenance is performed on those REO properties to get necessary value at the foreclosure sale or REO sale. Reverse REO properties are more likely to lack any upgrades than their counter part forward REO properties which would require less maintenance during the holding period thaf they are on the market.

  • This is the key takeaway:
    “We are digging deep in the portfolio to find out of the problem is on the front end or the back end,” Montgomery said. “My sense is that it’s more on the back end in terms of the losses we are experiencing. Part of ‘triaging’ is [determining] why that is happening.”

    It is good that Mr. Montgomery is shining a light on this.

    On the appraisal issue, could it be that the Back End is the real culprit as a result of liquidating the collateral at lower than market, rather than the appraised value having been inflated in the first place? Putting pressure to lower initial appraised values to compensate for inefficient liquidation processes is not the answer. I hope that is not what develops, but rather bring in some other servicers to handle HUD’s portfolio to shore up the back end process.

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