[Update] Despite Gain, Reverse Mortgages Continue to Weigh on FHA Insurance Fund

The reverse mortgage portion of the Federal Housing Administration’s Mutual Mortgage Insurance Fund continues to drag on the overall government-backed portfolio, according to an annual actuarial review of the fund’s finances released Thursday morning.

At the end of fiscal 2018, the Home Equity Conversion Mortgage cash flow net present value, a measure reported to Congress by the Department of Housing and Urban Development and endorsed by actuarial firm Pinnacle Actuarial Resources, was estimated to be negative $13.63 billion. That’s a slight increase from a negative value of $14.5 billion estimated in fiscal year 2017, but the HECM portfolio ended this year with a negative 18.3% capital ratio, according to the report’s findings.

In contrast, the fiscal condition of FHA’s forward portfolio is marked by an economic net worth of $46.8 billion and a capital ratio of 3.93%, an improvement over fiscal year 2017.


In light of the negative economic value relative to the positive performance of the forward portfolio, the HECM program continues to be a risk for FHA that the agency is monitoring, Department of Housing and Urban Development Secretary Ben Carson said during a call with reporters.

“The financial health of FHA’s single family insurance fund is sound,” Carson said. “There are some risk factors that we need to pay close attention to. Specifically the reverse mortgage [program] continues to be a significant drain on FHA’s insurance fund. Younger borrowers with forward mortgages continue to subsidize senior borrowers in our HECM program to an unsustainable degree.”

FHA Commissioner Brian Montgomery echoed Carson’s statements on risks presented by the HECM portfolio, noting that the agency is committed to monitoring and improving the program, and that recent program changes are beginning to take effect.

“We are committed to maintaining a viable HECM program so that seniors can continue to age in place. But we cannot continue to see future HECM books subsidized by borrowers using our forward mortgage programs,” Montgomery said during a call with reporters. “We have taken several steps to improve the performance of our 2019 HECM book, and future HECM books of business, and preliminary indicators are that these changes will have positive effects.”

Recent measures taken to modify the reverse mortgage program — including last year’s lower principal limit factors and this year’s new appraisal requirements — have been seen as positive in FHA’s efforts to improve the economic health of the fund, HUD officials said; however, those changes address the most recent books of business rather than shortfalls stemming from loans originated prior to 2015. Leadership is working to protect principal limit factors and avoid additional mortgage insurance premiums, with an optimistic outlook, Montgomery said.

“We fully recognize the burden this places on the industry and our network of housing counselors,” Montgomery said of the most recent program changes. “We wanted to stave off any additional premium increases and protect [principal limit factors]. By implementing this appraisal review process and working closely with the Office of Management and Budget, along with our risk office and our contractor, we were able to get to a place where we did not have to have further reduction of the PLFs and increase premiums. We will continue to monitor the quality of the book throughout the year. We remain optimistic that the quality of the book will continue to improve.”

The final calculation includes several factors that both helped and hurt the overall value of the HECM portfolio. The team from the Bloomington, Ill.-based Pinnacle noted that the loans from fiscal years 2009 and 2017 actually outperformed their projections by about $1.3 billion. In addition, Pinnacle includes an economic outlook calculation in the overall net cash flow value; because Treasury and mortgage rates were lower than projected, the economic calculation boosted the cash flow value by $1.1 billion.

But lower origination volume in fiscal year 2018 docked the cash flow estimate by about $1.3 billion, Pinnacle wrote, and a gloomier outlook for loan termination and cash draws prompted the firm to lower its predictive model for the portfolio by around $1 billion.

Attention to occupancy issues

In speaking about past reverse mortgage defaults and non-borrowing spouse concerns, the HUD officials on the call indicated that many of the issues have been addressed for originations in 2015 and later.

“A lot of things have already occurred,” Carson said, indicating defaults with non-borrowing spouse implications are “water under the bridge.”

However, there may be additional attention placed on loans originated prior to non-borrowing spouse protections, Montgomery said, with an eye toward occupants in reverse mortgage properties.

“Non-borrowing spouses were an issue addressed relative [to the] books of business in 2015 forward,” Montgomery said. “The issue is the ones from 2014 [and previous] that we’re still reviewing.”

HUD will make an announcement soon relative to its findings, Montgomery noted, with a specific focus on occupants in the homes.

“We need a proper inventory of the occupants in those homes…We have fully recognized the fact some spouses might not be aware there was a reverse mortgage on the home, or that it would [become] their responsibility at some point,” he said. “We want to try to do our best to help better prepare some spouses and others for a future event that will come at some point.”

Industry encouraged by report findings

Industry organizations underscored their commitment to further improving the reverse mortgage program’s impact to the MMI Fund in comments made Thursday.

The National Reverse Mortgage Lenders Association highlighted the improvement in the HECM portion of the fund in a statement provided to RMD.  

“We are encouraged by today’s remarks by HUD Secretary Ben Carson and FHA Commissioner Brian Montgomery that changes to the HECM program seem to be having a positive impact on the MMI fund,” Peter Bell, NRMLA’s president and CEO said. “We agree with the HUD leadership that it is early and, as Secretary Carson said, ‘We are just now seeing the effect of the changes that were made.’”

The organization will continue to address issues relating to the insurance fund, Bell continued.

“At the same time, NRMLA will need to remain focused on addressing the issues that continue to effect the HECM impact on the insurance fund and, as an organization, work with HUD to find solutions that eliminate all concerns going forward and protect the availability of reverse mortgages as an essential option for retirement financing,” he said.

The Mortgage Bankers Association stated its concern for the HECM program, as well as its support of the program for future retirees.

The drain on the fund presented by the HECM program continues a trend that MBA has highlighted previously and remains a topic of concern,” said Robert D. Broeksmit, president and CEO of the MBA. “Reverse mortgages are an important financial tool that, if used properly, can allow the growing number of retirees to age in place. MBA applauds the recent steps FHA has taken to stabilize and improve the HECM program, and policymakers should continue considering ways to insulate the forward program from the volatility in the reverse program.”

Written by Elizabeth Ecker

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  • Did the HECM fund have a surplus before the great recession and thereby when combined bail out losses from forward FHA loan losses? If so why isn’t anyone talking about the surplus of old as I would think this would help change the current narrative that HECM is a drain why forward FHA loans are the savior …

    • Eric,

      Surpluses in the General and Special Risk Insurance Fund cannot be freely taken from that fund and applied to the HECM portion of the MMIF. That is IF there are surpluses in the G&SRIF since there is no reporting of the HECM activities in that fund to the public.

      It was a HUD suggested Congressional mandate found in HERA that required any new endorsed HECMs after 9/30/2008 to be accounted for in the MMIF.

      So while your questions has some rationality to it, it is one that would have a less than substantive answer. It would be based on air since there is no known actuarial review of the G&SRI Fund (or at least one posted on the HUD website).

      I hope that will give you some answer to your questions even though it lacks the response you would prefer hearing.

  • I agree with peter Bell’s statement. I also realize the gain was not a significant one. We need time to measure the true results of the changes made to the HECM program.

    The problem is, what more can we do without seeing the HECM fade away? If that were to happen, it would hurt our senior homeowner population significantly!

    This is a complex issue, do we subsidies the reverse mortgage insurance fund with the FHA’s forward portfolio economic net worth of $46.8 billion? At least until we see the true results of all the changes that have been made to the HECM?

    That is the 64,000 questions right now!

    John A. Smaldone

    • John,

      Where does Peter refer to a gain? There was no gain. The title to this article is very, very misleading.

      What the fund experienced was a restatement of loss for prior fiscal years, based on changes totaling $1.1 billion per HUD (and $1.3 billion per Pinnacle). That was spread over all nine years prior to fiscal 2018 and was more of corrections to book, modeling, and assumption issues. This was made with little detail as to why the corrections were made.

      Despite that good news, HUD tells us that fiscal year 2018 which had a loss of 1/8th in endorsements since fiscal year year 2017 that the loss for fiscal year 2018 is 14.6% less than the loss for fiscal 2017.

      On an average loss per HECM basis, the loss for fiscal 2018 was only 2.4% better than fiscal 2017. We are told that when we have a more representative population of endorsed HECMs which were impacted by Mortgagee Letter 2017-12, we will see an even better result which will, no doubt, the result.

      Yet the average loss per HECM endorsed in fiscal 2018 is 11.9% higher than the next highest average loss per HECM, those endorsed in fiscal 2009. The average loss per HECM for fiscal 2018 is over twice as large as the average loss per HECM for fiscal 2014, the best fiscal year for the average loss per HECM since HECMs started being reported in the MMIF back at the start of fiscal 2009.

      So I have no basis to provide much optimism in the goal of reducing HECM losses without severe reductions to the PLFs or a complete restructuring of the PLFs on a geocentric basis. This is especially true in light of the low home price index information provided in the HUD report and the Pinnacle review for last fiscal year.

  • As a friend points out, reductions in PLFs and the restructuring of the HECM MIP as mandated by Mortgagee Letter 2017-12 did little to reduce the average loss per HECM endorsed during fiscal 2018 when compared to the average loss for HECMs endorsed during fiscal 2018.

    After the changes/adjustments, HUD estimated that the loss on the fiscal year 2017 cohort of endorsed HECMs will be $1.811 billion while the loss for the fiscal year 2018 cohort will be $1.546 billion. The endorsements for fiscal 2017 were 55,292 while endorsements for fiscal 2018 were only 48,359. This makes the average adjusted loss per each HECM endorsed in fiscal 2017, $32,753 and the average loss per HECM endorsed in fiscal 2018, $31,969. That is less than a 2.4% reduction in the average loss.

    This clearly shows that the changes required by Mortgagee Letter 2017-12 were not as successful as hoped and clearly show the need for further PLF reductions in fiscal 2019 or another solution to the problem such as geocentric PLFs which will essentially provide higher PLFs for some parts of the country and less to the rest.

    Further dramatizing the loss problem is the home price appreciation rate discussed in the fiscal 2018 Actuarial Report. It is less than 1.4%. Yet we know that areas like Los Angeles, San Diego, San Francisco, and Seattle have all seen home price appreciation rates superior to that over the same period of time. Again HUD can recognize that there is a national average home price appreciation problem leading to the continuing large losses to see and address it directly through the geocentric PLFs that Shannon Hicks and others are supporting and calling for or a solution similar to geocentric PLFs.

    • “This clearly shows that the changes required by Mortgagee Letter 2017-12 were not as successful as hoped and clearly show the need for further PLF reductions in fiscal 2019…”

      You and I come to very different conclusions from your analysis. I think you’ve very clearly shown that this is not an origination issue and the PLF reduction / MIP increase should not have been done, since they only saved 2.4% from the projected losses. If / when they make the PLF change next October, they will remove the ability for anyone to make a living in the HECM space. I believe we are right on the edge now.

      • Matt,

        Your analysis would be on point IF it were not for trends. Following fiscal 2014, the average loss per HECM on the book of business for each new fiscal year has has been growing horrifically until fiscal 2018.

        So not only did the PLF reduction stop the average loss per each new HECM endorsed each fiscal year but that action has PROVEN to mitigate such losses.

        Then as correctly argued in the article, the reduction to the average loss per HECM came in fiscal 2018 despite most HECMs endorsed last fiscal having a case number assigned before 10/2/2017 meaning they were not subject to the lower PLFs of Mortgagee Letter 2017-12. How much larger will the reduction be in fiscal year 2019 when none of the HECMs endorsed that year will have case numbers assigned before 10/2/2017?

        So it seems the just cited Mortgagee Letter has done its job and as to its start, done it reasonably well. The results should be even better for fiscal 2019.

  • George and Matt,

    You both bring up very good points to my attention in your comments and George, in your reply back to me. As I read your comment George as well as your explanation, there is reason for me to reconsider, especially my first sentence.

    In view of that, I do change my opinion on certain things that I stated in my comment. Also, what Matt Neumyer’s comment outlined holds a lot of Water as well.

    Yet, Matt’s comment in his last paragraph would be devastating to the industry as a whole! This is why I said in my first comment on this article, which I will re-state it below:

    “This is a complex issue, do we subsidies the reverse mortgage insurance fund with the FHA’s forward portfolio economic net worth of $46.8 billion? At least until we see the true results of all the changes that have been made to the HECM? That is the 64,000 questions right now!”

    We don’t want to NOR should we see the reverse products go away! By lowering the PLF will probably do just that. It will at least effect those who want to originate the product further! The consensus will be, no one will be able to make a living in the reverse mortgage space any more!

    Personally, I don’t feel that will be the case, or should I say it does NOT have to be the case.

    If, and I say IF, HUD/FHA and the FED’S decide to lower the PLF’s, there still will be life left in reverse mortgages!!

    Proprietary products are emerging and do not have the MMI fund to be concerned about, remember that!

    In addition, the HECM can still serve a purpose for those with little to no debt on their properties.

    The big problem lies, if the PLF’s are lower, will originators bust tail to do what is necessary to do what I mentioned above and keep the reverse mortgage space alive?

    I am hopeful the Feds will find another alternative way to keep the reverse mortgage alive, rather than to lower the PLF!!!

    Our seniors need the product, maybe more than ever as time goes by!!!!

    John A. Smaldone

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