The Home Equity Conversion Mortgage (HECM) program has been experiencing difficulties in securing greater volume over the past year, particularly since changes were made to principal limit factors (PLFs) and insurance structure (MIP) in October of 2017.
HECM program observers and proponents have sometimes argued that separation of the forward and reverse mortgage programs under the Mutual Mortgage Insurance (MMI) fund could assist in bringing the FHA-insured reverse mortgage program back to greater health, especially since projected HECM program losses made by FHA over the course of 2019 have predicted losses to be similar to those endured in 2018.
“[The separation] recommendation is one that we have made a number of times before, actually,” said Laurie Goodman, a vice president at the Urban Institute and co-director of its Housing Finance Policy Center in an interview with RMD. “We made it in 2017 and I believe in 2015.”
One of the issues that prevents a separation of the forward and reverse programs under the MMI fund is the fact that it requires authorization from the highest levels of the United States government.
“It [would have to be] a Congressional change,” Goodman explains. “Congress would actually have to remove the HECM portfolio from the MMI fund. FHA can’t decide to do it [on its own], and the likelihood that Congress [would take action on it] is reasonably low.”
A separation of the forward and reverse programs makes sense according to Goodman, by virtue of the fact that the forward program is much larger than the reverse program and could therefore lead to better decision-making in managing both relative to their individual sizes.
“[The vast majority] of the mortgages are actually forward mortgages, not reverse mortgages, but the reverse mortgage program introduces a lot more volatility,” Goodman said.
Separating the two would also allow decisions being made for the reverse program to be more individually tailored to its own unique realities.
“If the reverse mortgage program was on its own, you would think more carefully about how exactly you want to model the program. Basically through the reverse program, you’re making estimates over such long periods of time, minor differences in modeling assumptions can make a big difference in the results,” Goodman explained.
Researchers at the Urban Institute were also surprised by the most recent MMI fund results, given that they believed changes made by FHA to support the reverse mortgage program should’ve conceivably been reflected in the results to some degree.
“[We] were actually puzzled on the trends this year where you actually had a [pronounced] loss in the reverse program despite the improvement in the economy and the actions the FHA has taken to improve the program,” Goodman said. “[The actions FHA has taken] haven’t shown up at all in the numbers, which is itself puzzling. Ideally, you would like to see some initial improvements off of the changes that have been made so you can estimate what more needs to be done.”
One major topic concerning changes made by FHA to the reverse mortgage program is the second appraisal requirement, an addition made to the program in an effort to stem its losses to the MMI fund. This change is unlikely to make much of an impact, however, according to Goodman.
“It’s a drop in the bucket. Obviously, fraud in all forms is not a good thing, and appraisal bias is itself a form of soft fraud,” she said. “The FHA is very sensitive to reducing fraud, and their own estimate is that the appraisal bias is now under five percent down from 10 percent a few years ago.”