Following up on a directive to reform and streamline housing finance made by President Donald J. Trump in a March memorandum, the United States Department of the Treasury has submitted its housing finance reform plan to the president for his approval, which includes specific proposals to streamline the Home Equity Conversion Mortgage (HECM) program.
Aspects of the proposed plan include seeking more efficiencies for the HECM program — which include the elimination of HECM-to-HECM refinancing, and the creation of geographically-based loan limit values similar in nature to those in the forward market — while also ending federal conservatorship of both the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”).
Consisting of a series of reforms that are both legislative and administrative, the new plan is designed to insulate American taxpayers against future bailouts while preserving the 30-year fixed-rate mortgage. These reforms are being proposed to, “help hardworking Americans fulfill their goal of buying a home,” according to a Department of Treasury press release.
“The Trump Administration is committed to promoting much-needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” said U.S. Treasury Secretary Steven T. Mnuchin in the release. “An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”
Among the key HECM recommendations, the plan encourages three administrative proposals including the development of new HECM servicing standards and the elimination of HECM-to-HECM refinancing. A legislative proposal the plan makes is to revise the loan limit structure in the HECM program to reflect variation in local housing markets, as opposed to operating off of one national HECM lending limit, which currently sits at $726,525.
Treasury also recommends removing the HECM program from the MMI Fund entirely, which would take an act of Congress to accomplish.
“Congress should set a separate HECM capital reserve ratio and remove HECMs as obligations to the MMIF,” the plan reads. “This would provide for more transparent accounting of program costs and decrease cross-subsidization that occurs with mission borrowers in the forward mortgage portfolio.”
Under the Department of Housing and Urban Development (HUD) housing reform plan, the executive summary of the proposed plan takes aim at the HECM program for its impact on the Mutual Mortgage Insurance Fund (MMIF).
“FHA […] must continue to develop policies that ensure its reverse mortgage product – HECM, which has cost the MMIF billions of dollars in claims in recent years – is fiscally sustainable,” the summary reads. “To ensure that HUD and taxpayers are properly compensated for riskier loans, FHA should implement a ‘tiered pricing’ framework to protect the MMIF.”
One of the direct proposals in the plan that references inefficiencies in the HECM program is aimed at staff shortages, which can be mitigated by hiring and retaining qualified personnel at both the Federal Housing Administration (FHA) and Government National Mortgage Association (GNMA), the plan says.
“Despite a significant increase in volume in both the forward and reverse mortgage programs, FHA’s Office of Single Family Housing staff has decreased from 1,007 full-time employees (FTEs) in 2010 to 751 FTEs as of August 2019, a decline of 25 percent,” the proposal reads. “By addressing these human capital challenges, FHA and GNMA can improve the management and oversight of their guaranteed loan and MBS portfolios.”