FHA Commissioner States Commitment to HECM, But Concerns Remain

The Home Equity Conversion Mortgage product remains a priority for the Federal Housing Administration, which is continuing to examine both originations and back-end processes in order to ensure the program is self-sustaining, according to statements delivered by Federal Housing Administration Commissioner Brian Montgomery during the National Reverse Mortgage Lenders Association annual conference in San Diego on Tuesday. The commissioner reiterated his department’s dedication to the program, noting that recent changes have been made to avoid additional cuts to principal limit factors and raising insurance premiums.

“I want to reiterate that we believe in this program,” Montgomery said. “It is good for many seniors and I believe it needs to be there in the long-term.”

However, the program’s negative impact to the FHA’s Mutual Mortgage Insurance Fund has led to the “annual ritual” of developing short-term fixes, including most recently a call for second appraisals on some reverse mortgage properties and more flexible documentation for servicers when filing claims with HUD. The changes are the result of research done by a HUD working group called for by Montgomery upon his confirmation earlier this year to identify ways to mitigate the HECM program’s losses to the insurance fund.

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“Last year [the program] drained $14.5 billion from the MMI fund and continues to be heavily subsidized by the forward book, so much that we were just barely above our mandatory 2% capital reserve ratio required by Congress at the end of the last fiscal year,” Montgomery said.

Major program changes instituted in October 2017, which consisted of increasing mortgage insurance premiums and reducing principal limit factors, were not enough to stem losses, so other measures needed to be taken to diligently manage FHA’s risk, he noted.

On the back end, the FHA has been working to improve efficiency for the cases that are re-assigned to HUD. Montgomery said staff has worked to clear out the backlog of these reassignments that were in place when he became commissioner.

“There are now only a handful of HECM assignment requests still in the backlog,” he said.

Another measure to improve the backend was to allow servicers to present alternative documentation when reassigning the case back to HUD to make the reassignment process easier for servicers. This was announced last week with Mortgagee Letter 2018-08.

“I believe these actions demonstrate our commitment to making it work,” he said.

Montgomery re-emphasized that the appraisal changes were less impactful to the program than other proposals — like further reducing PLFs or raising mortgage insurance premiums. He also acknowledged that the changes are difficult for the industry to withstand.

“[The] changes were least impactful than other options on the table such as an increase in monthly premiums and additional cuts to PLFs,” he said.

While he said he couldn’t give many details, the commissioner noted that the fiscal year 2018 MMI fund report would be published in the coming weeks, with more work needed to be done to help the HECM program.

“Changes FHA made to the PLFs and MIP were designed to help but did not fully solve for the financial volatility and this we must solve for if the program is to continue in the long term…Our goal was to stop the bleeding and improve the viability and sustainability of the program. We are dedicated to bringing this program to a level of self-sufficiency.”

Written by Maggie Callahan

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  • I hope someone can help me understand, since I was unable to attend the conference. Do we know the present value of real estate owned by HUD that has an active HECM against it or one that has terminated but the property hasn’t sold yet?

    Paying out $14.5B in claims sounds horrible, but what is the value of the assets that were taken over by Novad as a result of these claims?

    I’m also confused about continually making changes to the program in response to what is happening with claims being made now from earlier books of business. Is it all about making new HECMs so profitable for HUD that the revenue can be used to cover mistakes of the past? That’s a dangerous proposition as the next PLF change and MIP increase could push the market to a proprietary product dominated one.

    Thank goodness we have had the forward product doing so well that it has kept us in business.

    • Matt,

      As to the questions in your first two paragraphs, there are only two major types of losses reported in the MMIF. First is the estimated losses on 1) performing and non-performing HECMs that have NOT been assigned to HUD and 2) HECMs assigned to HUD. The second are the actual losses on terminated HECMs whether ever assigned to HUD or not. Then the total losses are reduced by the cash and other assets owned by HUD at fiscal year end (which are not collateral on HECMs since those home values offset in reaching the FHA estimated losses). So in other words the value of the portfolio of HECMs include the value of all insurance “policies,” whether they have terminated or NOT.

      The changes to the program since 10/1/2008 have had little to do with claims since that is but a category of the smallest of the two losses (i.e., actual losses) found in the MMIF.

      You are precisely right on two points. The first is further PLF changes, in particular, could make proprietary products even more competitive with HECMs for more prospects. The second is: “Thank goodness we have had the forward product doing so well…” (I assume you mean FHA forward residential mortgage products).

  • The concept of geo-centric PLFs has been suggested by more than one industry participant and would seem a logical and effective step in the direction of “sustainability” that we all seek. Has anyone heard any response from Montgomery/HUD to this suggestion?

    • Bill,

      Far too many industry participants want to look at actual results. That is impossible since less than 2% the HECMs that terminated in fiscal 2018 were endorsed in fiscal 2018. Remember the 10/2/2017 changes only affects the new book of business for fiscal 2018. We will not substantially know actual results on the fiscal 2018 book of business until around 2040 or much latter.

      What we do know is that based on preliminary FHA analysis, the new book for fiscal year 2018 will result in losses, substantial losses. Last year, only the fiscal year 2014 book of business is expected to come in with a loss of less than $800 million, while the estimated loss per FHA on the fiscal year 2017 book of business could be well over $1.9 billion.

      Certainly I was not expecting the tepid reduction to principal limit factors on 10/2/2017 to bring the loss for the new book of business for fiscal 2018 under $800 million. Whoever expected the 10/2/2017 MIP changes to have substantial impact on the fiscal year 2018 book of business estimated outcome does not understand the MMIF estimation process done by the FHA and the independent actuaries annually.

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