HUD Sec. Carson: HECM Changes Positive With More Reforms Needed

Secretary of the Department of Housing and Urban Development (HUD) Dr. Ben Carson reiterated Tuesday his and the department’s commitment to addressing the financial viability of the Home Equity Conversion Mortgage (HECM) program, stating recent program changes have been “directionally positive.”

He shared this commitment in a statement submitted to the House Financial Services Committee ahead of a scheduled hearing regarding the housing policy of the Trump Administration.

Appearing alongside Secretary of the Treasury Steven Mnuchin and Federal Housing Finance Agency (FHFA) Director Dr. Mark Calabria, Carson’s statement detailed many of the recent issues faced by the HECM program and reiterated recent proposals by the Trump Administration to shore up the program’s finances within the Mutual Mortgage Insurance Fund (MMIF).

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“The HECM program, which has supported millions of American seniors to ‘age in

place,’ has suffered significant financial distress in recent years,” Carson says in his statement. “At the end of FY 2018, FHA’s HECM portfolio had an economic net worth of negative $13.63 billion and a standalone capital ratio of negative 18.83 percent.”

While general financial volatility within the HECM program has remained a “constant challenge” for the Federal Housing Administration (FHA) despite major program changes, there have been signs of positivity that have extended from corrective actions taken by FHA to address issues with the program’s financial viability.

“Changes to the program’s principal limit factors and insurance premiums in 2017, and the implementation of an appraisal inflation risk mitigation policy in 2018, […] have been directionally positive on the program’s fiscal solvency,” says Carson.

HUD committed to HECM reforms

Commitment to proposed reforms was also reiterated by Carson in his written statement, echoing key recommendations made earlier this year by the Trump Administration.

“First, HUD recommends Congress reform the loan limit structure in the HECM program to reflect variation in local housing markets and regional economies across the U.S. instead of the current national loan limit set to the level of high-cost markets in the forward program ($726,525 for calendar year 2019),” Carson says. “Second, HUD proposes Congress set a separate HECM capital reserve ratio and remove HECMs as obligations to the MMIF — reforms that would provide for a more transparent accounting of the program costs and decrease the cross-subsidization that occurs with mission borrowers in the forward mortgage portfolio.”

The third HUD proposal is for FHA to eliminate HECM-to-HECM refinances, which HUD recommends removing because “these transactions result in greater appraisal inflation, increasing program costs, and negatively impacting GNMA-guaranteed HECM MBS (HMBS) due to quick ‘churn’ in pool participations,” Carson says.

Industry remains cautious about proposals

Secretary Carson and HUD’s commitment to the Trump Administration’s HECM program reform proposals remains firm in spite of general caution exhibited by the reverse mortgage industry itself. Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA), expressed skepticism regarding the imposition of geographically-based HECM lending limits, arguing that such limits serve more of a purpose in the forward market when compared to the reverse market.

“Applying the forward mortgage concept of ‘area limits’ to a financial resource (HECMs)

created for a completely different population at a completely different time of their life

would be ill-advised,” Bell said in a statement submitted to the House ahead of a HECM-focused hearing last month. “This discussion took place in the [Financial Services] Committee when the single national limit was enacted in 2007-2008 and that provision should remain in place.”

The elimination of HECM-to-HECM refinancing is an interesting proposal depending on the way it would be implemented, according to John Lunde, president of Reverse Market Insight.

“Ultimately, [this proposal] would reduce the refi volume directly but might also reduce non-refi volume, as it could introduce more cautious approach by borrowers if they can’t refinance if/when better rates/terms come along,” Lunde told RMD in a September email. “[That can happen] particularly if it was very strict in saying a borrower could only ever do one HECM on a specific property. It seems like a very strong reaction, and I’m curious what the motivating factor for it is.”

While recent reports indicate that the HECM program is still generating a small number of cash receipts for the federal government, much of the future action related to the program will depend on the annual MMIF actuarial report which is expected by the middle of next month.

Read Carson’s full statement to the House Financial Services Committee.

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    • John,

      There is that view and there is the view of protecting the MMIF. Is it fair that forward borrowers pay unnecessary MIP to carry the HECM program?

      Most of us like things the way they are without change. Yet how we are to right a ship that is headed the wrong way directly into waves that could sink it? Sometimes sacrifices must be made in order to obtain our goals.

      Unlike what a large segment of the industry thinks, since October 1, 2008, each new cohort of annual endorsements have been estimated to have negative net present value from future cash flow. It has been startling how negative the situation is in light of what we were told back 15 years ago and much earlier. I remember faithfully telling seniors who asked that US taxpayers paid nothing for the HECM program since it was self-sustaining. It was not until the HECM program was first tested by independent actuarial companies that the real situation of losses began to be seen.

      Many hope that changes to the back end will result in large reductions to losses for future books of business. While we can hope, there are still things we can do that will make a difference in the future but the cost to many industry participants seems too high.

      For now reducing MMIF losses means enacting the changes to the HECM that the Secretary is proposing. Like many I am holding my breath until the actuarial review for the fiscal 2019 is posted on the HUD website in mid November 2019. That and the annual report of FHA on the financial status of the MMIF will provide a clearer picture of how effective the changes of the last two years have been. Let us hope for the best and work for something better in the future.

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