[Updated] MMI Report Shows Improvement in FHA Reverse Mortgage Portfolio

The reverse mortgage portion of the Federal Housing Administration (FHA) Mutual Mortgage Insurance Fund (MMIF) continues to stand at a negative capital ratio on the overall government-backed portfolio, according to an annual actuarial review of the fund’s finances released Thursday morning. However, it has made notable progress over the past year, increasing $7.7 billion in value and marking a 50% increase in the HECM portfolio’s capital reserve ratio.

“This report is welcome news,” said FHA Commissioner and Acting Deputy Secretary of the Department of Housing and Urban Development (HUD) Brian D. Montgomery on the HECM program’s performance in FY 2019 in a press release. “The improvements we’ve begun to put in place in the last two years to stem the losses of the reverse mortgage portfolio, aided by favorable economic conditions, are contributing to some improvements in our reverse mortgage portfolio.”

The 2018 value of the HECM portfolio stood at -$13.63 billion, and has grown in a positive direction to -$5.92 billion this year, with the overall FHA MMI Fund capital ratio for FY 2019 at 4.84%, the highest level since FY 2007, according to HUD. This report indicates a positive shift in the health of the HECM book of business, according to Montgomery.


Additional changes possible

Commissioner Montgomery added that while FHA is encouraged by the latest results for the HECM portfolio, additional changes to the reverse mortgage program are still potentially on the table in order to improve its standing even further.

“We are considering some other changes [to the HECM program],” Montgomery said in response to RMD on a call with reporters Thursday morning. “I don’t think we ever envisioned that the FHA reverse mortgage product would dominate the market for now, almost 30 years. I know there have been some proprietary products that have grown in the industry.”

The addition of proprietary reverse mortgage products can play a role in further stabilizing the HECM program in order to accomplish part of FHA’s mission, Mongtomery added.

“We want the private industry to help serve that market, as well,” he said. “It’s a vital part of FHA’s mission to help the elderly. So, we look forward to working with the industry and other stakeholders, consumer groups, senior groups and similar stakeholders as we move forward and continue to get this program in a better position.”

The strength of the economy and actions taken by the president are also responsible for the health of the fund, according to HUD Secretary Dr. Ben Carson.

“The financial health of FHA’s single-family insurance fund is as sound as it has been in over a decade,” said Carson in a statement. “We have a strong economy with nearly full employment due to President Trump’s leadership, and this economic growth helps set the foundation for ongoing improvements in our FHA portfolio.”

At the end of fiscal 2019, the Home Equity Conversion Mortgage (HECM) capital ratio, a measure reported to Congress by HUD and endorsed by actuarial firm Pinnacle Actuarial Resources, was estimated to be -9.22%. While this is still negative, it marks a notable increase from the -18.83% ratio observed in fiscal year 2018.

The fiscal condition of FHA’s forward portfolio is marked by an economic net worth of $66.6 billion and a capital ratio of 5.44%, an improvement over fiscal year 2018.

Industry response

The performance data for the HECM portfolio in the report is encouraging to the National Reverse Mortgage Lenders Association (NRMLA), according to a statement the association shared with RMD.

“We are pleased to see that the recent changes to the HECM program are having their intended effect of continuing to improve the HECM performance within the MMI fund,” said Steve Irwin, EVP of NRMLA in an email to RMD. “There have been significant strides made, as detailed in the improvement in HECM Capital. We look forward to continuing our discussions with the Department regarding additional program enhancements which may further bolster the HECM performance within the MMI fund.”

The continued growth of the MMI Fund is encouraging to Robert D. Broeksmit, president and CEO of the Mortgage Bankers Association (MBA). While the growth is encouraging, FHA should continue to take steps to ensure that the health of the forward mortgage program is not adversely affected by the HECM book of business, he said.

“We encourage HUD to closely monitor risks to the Fund, including the layering of risks that could contribute to future defaults, as well as oft-cited challenges associated with the HECM program,” Broeksmit said in a statement. “MBA urges HUD to continue to address ‘extreme risk layering’ quickly to protect the core of the program, while also exploring ways to ensure that premium levels for forward mortgages are not adversely impacted by the challenges in the HECM program.”

Recent history

Previous years’ performance of the HECM portfolio within the MMIF have led to numerous recommendations from people within both the public and private sectors to remove the HECM portfolio from the MMIF, with Urban Institute researchers recently saying that the major differences between the forward and reverse books of business justified a different home for the HECM portfolio.

“I think HECM should be moved out of the MMIF, and leaving them in does a disservice to both programs,” said Laurie Goodman of Urban in a House hearing dedicated to the HECM program this past September. “They’re very, very different, and each program should be advised on their merits.”

In an effort to minimize the severity of the HECM program’s impact on the MMIF, FHA made a series of major changes to the program in the form of a reduction to principal limit factors (PLFs) in October 2017, as well as the institution of a collateral risk assessment in September 2018 that came with the possible necessity of a second property appraisal. Commissioner Montgomery expressed optimism about the effect that these changes were having when speaking to the reverse mortgage industry earlier this year.

“These changes will help assure the viability of the HECM program going forward,” Montgomery said in May. “Most recent financial estimates are encouraging, showing that the effect on the MMI fund is improving.”

Written by Chris Clow and Elizabeth Ecker

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  • Once again Secretary Carson states that HUD is committed to reforms like eliminating HECM refis when he says: ” Reforms should not and need not wait on legislation, and we are implementing the proposals for which HUD has authority in the absence of further Congressional action. ” Anyone have any idea what the timeframe is for getting all of that done???

    Because the Annual Report to Congress passes through so many hands, the terms, idioms, acronyms, and jargon can substantially vary between parts of the report. An example of one such flaw is the following that appears on Page 15 and is one of the items that were changes to the HECM program during fiscal 2019: “Guidance for HECM’s assigned prior to 2014.” Quite frankly that phrase threw me for a loop.

    Then I wondered if the item changing the HECM program had nothing to do with endorsed HECMs that were assigned to HUD prior to 2014 but the writer was referring to Mortgagee Letter 2019-15 which “updated” the guidance on the HECM Mortgagee Optional Election related to Eligible Surviving Non-Borrowing Spouses as stated in Mortgagee Letter 2015-15 (and modified by Mortgagee Letter 2016-05). For the three Mortgagee Letters to apply, the related HECM must not have terminated and must have a case number which was assigned before 8/4/2014 (not “prior to 2014” as stated in the quotation above). Mortgagee Letter 2015-03 is another Mortgagee Letter that applied to the Optional Election until Mortgagee 2015-12 rescinded it in whole and did not replace it!! Mortgagee Letter 15-15 did for all intents and purposes replace Mortgagee Letter 15-03.

    Yet nothing in the Annual Report by HUD explains or amplifies upon the three adjustments that Pinnacle presents in Table 8 of its Actuarial Review of the HECM Portfolio for fiscal 2019. This information should have been addressed by HUD in its Annual Report not only because HUD and Pinnacle use different numbers but it specifically involves changes in the HECM portfolio books, the HECM financial model, and the assumptions used by HUD. Perhaps the book changes are the most necessary to explain since the amount related to those changes was $3.46 billion. The book changes involve total changes to the Pinnacle calculated negative net present value of future cash flows for fiscal years 2009 through 2018 (inclusive) of over 24.3%, making the negative net present value for HECM future cash flows drop from $14.217 billion to $10.757 billion before considering the other two adjustments. The net effect of all three adjustments was to make the negative net present value for HECM future cash flows drop to $10.678 billion for a total reduction of 24.9% which means that the assumptions’ and model changes netted to just a positive $79 million or 0 .6% of the negative $14,217 billion.

    On the other hand, the FHA computed negative net present value for HECM future cash flows for fiscal years 2009 through 2018 (inclusive) dropped from $15.447 billion to $7,335 billion or 52.5%. That is far more material than a drop of 24.9%.

    To be clear, adjustments of this enormity (that is, as a percentage of the total reserves should be explained by HUD management). To be clear when it comes to accounting, this lack of disclosure is inexcusable and would not be tolerated by the SEC and should not be tolerated by the Office of the Inspector General. It is not that the adjustments are necessarily hiding any “crime or misdemeanor” but this brings us back to the days of David Stevens and Carol Galante when “HECM losses” were arbitrarily offset by MMIF forward mortgage positive reserves without adequate disclosure or explanation. To the casual observer, such triflings may sound admirable since it was intended to lessen the threatenings of the Republicans in Congress against a loan program specifically designed for senior retirees but in fact, it further diluted the credibility of HUD as to reporting the results of the HECM program. Instead of becoming more transparent under the Obama Administration it seemed FHA reporting on the HECM program was “being fixed” since the program could not withstand scrutiny.

    While the change from questionable reporting practices to Stand Alone reporting has been very pleasing, a less than diligent view of the need for full disclosure on breath taking adjustments like the three presented by the actuaries is very, very disappointing. HUD can and should do much better than it did in its Annual Report to Congress on the Financial Status of the FHA Mutual Mortgage Insurance Fund for the fiscal year ended September 30, 2019. Even the adjustments made in the Annual Report for fiscal 2018 were not disclosed but they had a much lesser impact to the financial information contained in that report.

  • I don’t know about anyone else, but I feel everyone should be very encouraged by this news, unless I am missing something?

    To me this says, the future of the HECM is still very much alive!

    John A. Smaldone

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