Because of the high costs to the Federal Housing Administration (FHA) associated with the Home Equity Conversion Mortgage (HECM) program within the Mutual Mortgage Insurance (MMI) fund, FHA should focus on reducing costs by addressing losses on assigned loans as opposed to narrowing the program’s eligibility requirements. This is according to blog post released by the Urban Institute on Friday written by Laurie Goodman and Edward Golding.
By expanding the levels of participation, FHA would be better equipped to course-correct the financial status of the HECM program since much of the corrective action taken by the agency in 2017-18 actually served to limit participation instead of expanding it, the researchers write.
“In an era when seniors are sitting on a mountain of housing wealth and having anxiety about their finances, this should be a well-used program,” the blog post reads. “Instead, despite a growing number of seniors, participation has dropped from 73,112 mortgages in fiscal year 2011 to 48,327 mortgages in 2018.”
In that same period of time, FHA made a series of changes designed to return the program to financial health while also limiting the scope of potential participants by increasing upfront costs and reducing the amount of loan proceeds that can be taken out upfront. All of these changes reduced program participation while it has remained in poor financial health, the blog reads.
By addressing the fact that assigned loans lead to losses for FHA, the program’s scope can be improved while having a positive impact on the HECM program’s place in the MMI fund, the researchers say.
“If HUD could continue to accept assignment of HECM loans but allow servicing to be performed by the current servicers, it could improve the health of the MMIF without impacting the program’s scope,” the blog post reads. “The loans would sit on the FHA’s balance sheet. Servicer performance could be monitored by comparing the loss severity of the loans they assign with those they don’t assign.”
Another alternative that can assist in elevating the fiscal health of the HECM program is to develop a program of securitization which repools loans after they have reached 98 percent of the maximum claim amount (MCA), and can no longer be included in the Ginnie Mae Home Equity Conversion Mortgage-backed Securities (HMBS) program.
“This new securitization product (referred to as HMBS 2.0), would lower the funding cost for the servicer and provide an incentive not to assign the loans to the FHA,” the blog post reads. “This alternative deserves closer study; the gains to the MMIF need to be quantified.”
Because evidence indicates that FHA is experiencing greater losses than necessary by transferring servicing when loans reach 98 percent of the home’s initial value, allowing existing servicers to retain servicing for the rest of the life of the loan would stem the tide of unnecessary losses, the researchers write.
“This is critical to the future viability of this valuable program for seniors,” the post reads.
Read the full blog post at the Urban Institute.