The Home Equity Conversion Mortgage (HECM) program is a unique hybrid of the public and private sectors, with a great deal of interest directed toward the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) who set the policies by which that program operates.
RMD had the opportunity to sit down with Brian D. Montgomery, the FHA Commissioner and Acting Deputy Secretary of HUD, in an exclusive interview at the National Reverse Mortgage Lenders Association (NRMLA) Eastern Regional Meeting in New York in May.
In this first part of the interview – which can be heard in its entirety now on the second episode of the recently-launched RMD Podcast – the Commissioner shares his perspective on the HECM program’s health thus far in 2019, along with addressing the effectiveness of the second appraisal rule and his view on the expanding proprietary marketplace.
First thing, and you touched on it a bit in your presentation, but I wouldn’t mind getting some more original perspective from you. I’d love to know your perspective on the health of the HECM program so far this year, and how do you think FHA will accomplish the review of the program that the president asked for back in March?
I’ll address that one first. The president signed the memorandum on housing finance reform on March 27. I won’t recite it back to you, but part of what’s in there is some charges under the HECM program, some tasks for us, some of which we’ve been working on. One of the things we want to do, in addition to bringing back more private capital, is also what’s called ‘de-risking the portfolio’ in ways that still allows us to certainly do our mission. So, as I articulated a minute ago, a lot of those efforts we’ve been working on for the last two fiscal years, and certainly the administration before us, as well.
So, that work continues. Our timeline to get something out on housing finance reform is sometime this summer, probably late summer. We’ll have some proposals in there on the forward and the reverse book. Not just for FHA and Ginnie Mae, but obviously some for the GSEs, some that can be done administratively and others that will require legislation. So, we’ll see how Congress reacts to that going forward. In terms of the performance of the HECM book, it wasn’t that long ago – three or four years ago – in the MMI fund that the HECM portfolio carried the forward portfolio over the finish line, if you will. That hasn’t been the case the last three years, at least.
There are a lot of reasons for that. The appraisal inflation, it turned out, was a serious contributor to the current economic value. If you think about it, if you have a highly-inflated appraisal on the front-end, you’re already in a hole, especially in a housing market that doesn’t have home price appreciation. And then, you kind of feel it on the back-end too, because a lot of seniors aren’t using the money to put in granite countertops and do additions. As you get a little older, it gets a little more difficult to take care of the house. We were feeling it on the front-end and on the back-end, and we think it had a huge impact, or negative economic value.
The changes to the PLF, the MIP increases in some instances, coupled with the appraisal modification program appear to be having a positive effect. That doesn’t mean we’re completely out of the woods, so to speak, but from the snapshot-in-time perspective it appears that we have about a $3 billion positive swing for the economic value of the portfolio. Again, I caution, that’s a snapshot in time, but a good one. And, we’ve been modeling some of the cohorts done around some of the previous changes RMSA (the Reverse Mortgage Stabilization Act of 2013) and other things.
It appears the 2014-2017 HECM cohorts by themselves have a positive economic value today. So, I’ll always take good news. Again, I’m cautiously optimistic, but it appears so far – knock on wood – that the changes made in 2017 and 2018 appear to generally be heading us in a better direction.
Great, glad to hear it. Something that often comes up when I have conversations with everybody from originators to the heads of companies is the second appraisal rule. Is it having its intended impact, and is it likely to see any changes in the future?
Prior to beginning, the working group had looked at this issue. But, when we began what I affectionately refer to as a ‘triage,’ where we would meet in my conference room for hours on end triaging both the forward and the reverse book, we invited some folks from our Office of Policy Development and Research to participate as well. They have PhD economists and researchers, they’re a wealth of information for the HUD offices and support us in numerous ways.
A gentleman who was attending the meeting with us, I didn’t know him very well but could tell that he was acutely interested on the issue of appraisals and appraisal inflation. So, we started really peeling the onion back, if you will, and just doing some sampling of some loans done then using the historical AVM (Automated Valuation Models) data. It appeared to be a much bigger problem than we thought. Well, this gentleman from the Office of Policy Development and Research, it turns out he wrote a paper on appraisal inflation in the FHA program, including reverse mortgages.
So, when I found out about this, I asked him, ‘when was the paper done? 2010, or so?’ He said ‘no, it was done in 2017!’ I went, ‘really?’ (laughs) So, we got lucky there. Another place we got lucky is when we determined we were going to start running appraisals against our AVM. We had an existing contract with an AVM contractor that does other things, that helps us with our appraisal portal. And, it had the ability to run AVMs against ‘x’ number of appraisals. A number of that was well-enough to encompass the HECM volume, and in quick timing. We did all this in a matter of two or three months, in working closely with the Office of Management and Budget staff.
And, again, we wanted to stave off further cuts to the principal limit factor and increases in the premium, those were our guiding principles. And, OMB was very open-minded. We had some full-throated discussions, sometimes debates with them. And the other day, they accepted our appraisal mitigation as a viable option to stave off further cuts to the PLF, or premium increases. It went into effect quickly, and even though Congress doesn’t always pass budgets on time at the start of each fiscal year (laughs), the assumptions made in every government program have to go into effect. You have to have something you use as a guide for that fiscal year.
So, all of those go into effect. We estimated that probably 25-30 percent of appraisals coming in would require a second appraisal. We obviously have a threshold that we don’t reveal. But, the number has been a little less than that, it’s been hovering around 20-22 percent, and I think some existing HECM lenders are using AVMs, as well. Which is good! Between them and us, I think we all want something that represents what the true value of the product is, in this case the home. And again, just to be clear, while the appraisal inflation was extremely high in 2008-10, it had come down considerably. In more recent years, [it came down] as low as 4-8 percent.
But, it hadn’t been eliminated. And, it was eliminating it altogether – or getting it close to zero. Let’s face it: an appraisal is an opinion of value, right? And AVMs are built on a lot of different data variables, including comparable sales, if you will. But, it has come down considerably and again, our goal was to try to eliminate it as best we could. So again, directionally, it seems to be having its intended result, which is good for the long-term viability of the program.
As to continuing it, OMB and the Office of Information and Regulatory Affairs (OIRA) wanted to give it a fresh look at the end of each fiscal year. So, we’re doing that right now, and we’ll determine at some point whether or not we’ll continue using it. I would say we’ll certainly continue using it until the end of this fiscal year, September 30, but we’ll know before then what we intend to do for the next fiscal year.
I wanted to get your perspective on an aspect of the proprietary market. Is FHA encouraged by the influx of private reverse mortgage activity over the last 6-12 months, and would you say there’s a certain proportion of private versus FHA reverse mortgages that you see as a healthy balance for the market?
Well, we haven’t seen many proprietary products. There are some out, but I’m not as familiar with them as, obviously the groups that created them. I know Finance of America Reverse has a suite of proprietary products, in fact I think someone even said they had a presentation here.
I represent the U.S. government. We have the forward book, the reverse book, and there are a lot of options in the forward book. But, on the reverse mortgage, we’ve been almost the only game in town for some time. When I had this job before, when the loan limits were considerably lower than they are now, I think the environment was more conducive to proprietary products.
Once the FHA loan limits were increased following the Housing and Economic Recovery Act of 2008, and then ultimately when they rose up to a $625,000 nationwide limit, that probably pretty much crowded out a lot of the proprietary HECM products. But, as home prices came back certainly in other parts of the country, and California and New York and elsewhere, I think it’s tough giving way to an increase in proprietary products, which we think is great for the reverse mortgage program.
It’s not written or ordained that the U.S. government should be 100 percent of the program. Quite frankly, I couldn’t tell you what the exact percentage is, but it strikes me that there’s some number below 100 percent. (laughs) And I know it’s a little below that now, because there are some proprietary products available today. So, I would encourage the industry to continue to develop those. For our part, we’re going to help do what we can to ensure the long-term viability of the product.
I think it’s a great alternative for seniors. It’s not for everyone, but it’s served a lot of them through the years, and we just want to make sure we have it available for the long-term.
Listen to the full interview with Commissioner Montgomery now by subscribing to the RMD Podcast.