Urban Institute Makes Reverse Mortgage Suggestions Within 2019 FHA Trends

Because of losses that the Federal Housing Administration (FHA) estimates for the Home Equity Conversion Mortgage (HECM) program in 2019, FHA should release more loan-level data on the reverse program, as well as separate the HECM program from the forward mortgage program in the calculation of statutory minimum ratios. This is according to a blog post released by the Urban Institute on Tuesday written by Laurie Goodman and Edward Golding.

The blog post predicts four trends for FHA in 2019. The final trend addresses the reverse mortgage program, and offers two initial signs of positivity in it overall: type 1 claims that represent losses from disposing properties backing mortgages declined from $677 million to $612 million, and recoveries are increasing.

Still, FHA predicts it will lose 19 percent (approximately $14 billion) on this program in 2019, a figure which is roughly similar to the program’s losses on the MMI fund recorded last month at $13.63 billion.

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The post also notes that the FHA acknowledges an appraisal bias in the HECM program, but “appraisal bias on nonpurchase mortgages has long been a feature of the mortgage market, and the FHA estimates that the appraisal bias is now under 5 percent, falling from much higher levels 10 years ago,” it says.

The post also adds that the present appraisal bias “should not add much incremental risk” to the program, given that seniors can only tap approximately half of their home equity through it. This is where the post’s first recommendation comes into play, to “encourage the FHA to release more loan-level data on the reverse program so that researchers can better understand the drivers of risk in this program,” it says. “[A program] that appears to be hemorrhaging even in an environment with 7 percent home price appreciation.”

It also recommends to, “consider separating the Home Equity Conversion Mortgage Program for the forward program in calculating the statutory minimum ratios.”

The other FHA trends observed in the post for 2019 include that the FHA is performing well thanks to a strong housing market, the overall share of borrowers using down payment assistance has risen, and that cash-out refinances have also increased.

Read all of the observed 2019 trends in the blog post at the Urban Institute.

Written by Chris Clow

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  • While the recommendations have merit, they are also based on somewhat questionable data.

    First, Type 1 claims are for all HECMs both accounted for in the MMI Fund as well in the G&SRI Fund. It is very, very doubtful if the loss picture is improving so much on MMIF HECMs that have been endorsed after 9/29/2013 due to 2013 changes and then again after 4/26/2015 on 2015 changes as it is from the continuing rise in home values.

    Second, FHA is known for underestimating its potential for loss. This has been noted by other government entities when discussing the federal budget. It is clearly seen in the adjustments made for fiscal 2010 endorsements and then again for fiscal 2011 endorsements. In the first case, HUD predicted that it would have a surplus and thus showed a negative credit subsidy for that year. Even OMB got it wrong by almost $3.3 billion even though corrections were made for an almost $800 million loss in an updated budget proposal meaning HUD was off by well over $4 billion in its original budget proposal. The same thing happened with the fiscal year 2011 budget with the original budget proposal off by about $2 billion of which $250 million was corrected in the updated budget proposal. My estimate is that the HECM portion of the MMIF will show net assets of a negative $14.8 billion, if not a negative $15 billion before any prior period adjustments as showed up in the restated financial statements for fiscal 2017 and included in the fiscal year 2018 annual report and the actuarial review of the HECM portfolio for fiscal year 2018.

    Finally, with HUD expressing the opinion it did on appraisals as currently not providing any material threat to the MMIF, there seems to be a reasonable chance that Mortgagee Letter 2018-06 will receive its appropriate end on 9/30/2019 despite being championed by NRMLA. It seems all of the research effort of NRMLA in fiscal 2018 was for naught as this single suggestion had a one year sunset rule governing it.

    Now let us delve into opinion. Separating the capital reserves of HECMs from other MMIF programs only serves to change the nature of the MMIF. It then puts immediate pressure on Treasury to fund the negative net asset position of the HECM program. This would effectively make the HECM program a social program making the program even further under its primary regulator, HUD. The motivation for the proposed change is so that the other programs in the MMIF can make refunds of MIP and lower future MIP.

    The authors are very influential in the housing and residential mortgage industries along with federal housing programs both in Congress and the Trump Administration. Unless the split in the MMIF has more protections than indicated in the article, we could see quite a fight about keeping the HECM program.

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