The budget proposal submitted to Congress by the White House under the administration of President Joe Biden indicates strong performance for the Home Equity Conversion Mortgage (HECM) program inside the Federal Housing Administration (FHA)’s Mutual Mortgage Insurance (MMI) Fund, indicating that the program may have overcome the former “drag” status on the Fund that some analysts and prior government officials have ascribed to it in the past.
This is according to a section devoted to the U.S. Department of Housing and Urban Development (HUD) in the full budget document released by the White House late last week.
HECM: projected to generate receipts for the government
In the section of the budget devoted to HUD’s summary of loan levels, subsidy budget authority and outlays listed by program, the document reveals that FHA’s HECM program is projected to operate at a credit subsidy level equal to -2.54% in fiscal year (FY) 2022. This means that HECM is projected to generate more receipts for the federal government than it will pay out in claims for the year’s HECM book of business, marking for a substantive improvement in the overall position of the HECM portfolio and confidence in its solvency from HUD and the White House.
The estimated credit subsidy level of the HECM program for the remainder of FY 2021 is estimated to be equal to -2.39%, itself a marked improvement over the actual FY 2020 figure equal to -.08% as cited in the budget document.
The estimated FY 2021 figure of -2.39% is equal to the estimate last made in the Q1 FHA MMI Fund Programs report to Congress released in March, which detailed that the HECM program was exhibiting a trend of overall budget positivity even as raw volume had fallen relative to Q4 2020. That report detailed that HECM endorsement volume lost 6.81% when directly compared to the endorsement volume seen in Q4 2020, while HECM endorsements by count endured a very slightly smaller reduction, dropping 6.51%.
Based on the FY 2022 estimates detailed in the proposed budget, the HECM program’s estimated -2.54% credit subsidy will almost be equal to the estimated -2.69% credit subsidy of the entire MMI Fund. The addition of the new Home Equity Accelerator Loan (HEAL) pilot program, meanwhile, is projected to operate at a +1.21% level, meaning it is expected to cost the Fund.
The HEAL pilot program is designed to “test new loan products designed to lower barriers to homeownership for first-generation and/or low wealth first-time homebuyers,” according to HUD’s “Budget in Brief” document submitted alongside the full budget proposal.
The projection in the HECM program’s credit subsidy level for FY 2022 makes for a demonstrable change in trajectory for reverse mortgages based on previous FHA Annual Reports to Congress issued over the last couple of years, and the varying perspectives on the program from HUD and FHA officials that often accompanied those reports. However, the HECM program has shown steady improvement during that time that should make for a positive difference by the end of this year if the projections hold true.
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.
When HUD released its Annual Report to Congress in late 2019, the reverse mortgage portion of the Fund continued to stand at a negative capital ratio on the overall government-backed portfolio, though it did make notable progress between 2018 and 2019 by increasing $7.7 billion in value and marking a 50% increase in the HECM portfolio’s capital reserve ratio.
The following year, the negative value had been almost entirely diminished, sitting at approximately -$500 million compared with the -$5.92 billion figure recorded in 2019.
Change in perspective
At the time the 2020 report was released, then-FHA Commissioner Dana Wade expressed caution about the performance of the HECM program inside the Fund when asked to comment on its improvement by RMD.
“I think the important thing to note with HECM is that [its negative ratio] modeling is despite what is a very positive trend that we’ve seen, and have projected for house price appreciation,” she said at the time. “So, that’s certainly of concern to us.”
Commissioner Wade went on to say that the position of leadership at FHA and HUD revolved around moving the HECM program out of the MMI Fund, a move which would require congressional action to implement. As previously noted by RMD, the Biden administration is taking very little lead from its predecessors in the Donald Trump administration with respect to HECM, making no reverse mortgage-specific administrative or legislative proposals and apparently abandoning the prior recommendations made by HUD under the leadership of Former Secretary Dr. Ben Carson.
In terms of the budget request, HUD has requested $50 million over the enacted levels seen the prior year for a total of $180 million, which FHA attributes to increased costs for FHA mortgage servicing, largely singling out HECM servicing.
“The primary cause of the increase is the growing expense of servicing the Secretary-held HECM portfolio,” the document reads. “In addition, due in part to the increased volume of partial claims in response to COVID-19 and disasters, the Secretary-held mortgage servicing portfolio continues to grow. FHA anticipates expending significantly more resources to service these mortgages and to dispose of the properties once they become vacant.”
RMD reached out to several major reverse mortgage lenders for reactions to the information gleaned about the HECM program in the White House’s budget documentation, but representatives from each organization declined to comment with some instead deferring to NRMLA. When reached, NRMLA also declined to comment to RMD, but informed its membership of the projected economic numbers for the HECM program for the next federal fiscal year in an email update.
“The budgetary numbers are a further indication that FHA’s reforms over the past few years are having the desired impact,” NRMLA told members in the email update which was later posted to its website. “Since the HECM program is self-sustaining and doesn’t require an annual appropriation from Congress, the President’s budgets provide a valuable bellwether on future HECM performance.”