The newly-installed leadership at the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) must work through a series of structural issues and the filling of key leadership positions before any policy related to the Home Equity Conversion Mortgage (HECM) program can be meaningfully pursued, especially considering the stated policy priorities of the new administration and the problems that American housing faces in the wake of the COVID-19 coronavirus pandemic.
These were some of the assertions made by Jim Parrott, a nonresident fellow at the Urban Institute in Washington, D.C. and owner of Parrott Ryan Advisors in Chapel Hill, N.C. in a conversation which took place during the National Reverse Mortgage Lenders Association (NRMLA) Virtual Policy Conference in April, in a discussion hosted by Longbridge Financial CEO Chris Mayer.
Personnel matters and forbearance
When asked about what FHA and HUD need to do to be able to start getting their proverbial arms around the current housing situation, Parrott describes a scenario where the agencies need to get their own houses in order first before moving onto some other major problems facing housing in the United States.
“I think there are two things that will hold them up before they go big in their thinking on FHA, and the first is personnel,” Parrott says. “They are very thin. HUD and really any administration generally have bandwidth issues, and it’s a matter of, at least at FHA and HUD, getting the right senior housing finance team in place so that they’re competent in going big, frankly.”
Legislation already spearheaded by the Biden administration and signed into law, including the American Rescue Plan Act, indicates a desire on the part of government leadership to “go big” on spending proposals and packages as a way to strengthen the economy in the wake of the COVID-19 crisis, Parrott indicates. That means that any other major housing ideas will require leadership positions like a new FHA Commissioner, Government National Mortgage Association (GNMA, or “Ginnie Mae”) President and other senior advisors to the HUD Secretary to be filled.
“The Secretary of HUD is not a housing finance [person],” Parrott says. “So, there are at least a half-dozen positions that need to be filled so that when they get into [making key housing decisions], they are themselves confident when they come to a decision that they’ve thought everything through.”
Another potential issue that will need to be tackled quickly is the fact that many homeowners are in forbearance, which is likely to come to an end for many of them at the same time. However, presuming that some of these other issues are sorted out by the middle of the summer and the oncoming “storm” is not as severe as it otherwise could be, then the equation changes a bit, he says.
“Do you lower MIP or lower premiums? Do you provide a more targeted aggressive subsidy for folks who really want to help somehow given ownership? Do you provide even more relief on the backend for those who struggle? What do you do with that excess room you’ve got?,” Parrott asks rhetorically. “Because, there’s no reason for them to sit in on a 6-7% capital buffer. They don’t need to go back to exactly zero, but maybe there’s a sweet spot somewhere.”
Reverse mortgages and the HECM program
When it comes specifically to recommendations regarding the HECM program, Parrott was quick to point out that the audience of a reverse mortgage industry event is understandably predisposed to fully knowing and understanding the potential benefits that a HECM can provide to a member of the senior population. However, making the same case to a lawmaker or a reverse mortgage skeptic can be difficult.
Trying to reframe the perceptions of people in the federal government at the beginning of a new administration may be a little easier than it would be later, and comes down to framing, he says.
“If the frame around the policymakers is, ‘hey, this is a resource or tool for seniors to maintain their standard of living in an environment in which their revenue stream or wealth may be declining, [and can allow] them to live life in the way that they’ve been accustomed to when their resources are increasingly limited,’” Parrott describes as an optimal frame. “If that’s the frame, then policymakers are going to do what they can to shore it up, and make sure that it’s durable, sustainable and works. If you sell people on that frame [and convince them] that that’s what they should think about when they think of HECM, then you’re 80% of the way there. The next 20% is largely a matter of blocking and tackling, which all of us can do.”
The problem with a previous ‘frame’
However, if the frame instead revolves around HECM’s previous instability within the Mutual Mortgage Insurance Fund (MMIF) – which Parrott says may have been the case with key decision makers in the prior administration – and that vulnerable populations are more prone to seek out HECM during periods of financial volatility in their own lives, the job becomes much harder, he says.
“If that’s even half the frame, then you’re really at risk of being regulated to death, where they put in place risk mitigants that guard against the risk but do it in a way that you can’t thread the needle between guarding against the risk and having a viable business model,” he says. “And ultimately, it strangles the program to death.”
This is why it’s important for those engaged with policymakers to get in on the proverbial “ground floor” with new leadership at HUD and FHA, he says.
“I think part of the challenge here is that [the reverse mortgage industry] needs to roll up [its] sleeves and provide [policymakers] with useful advice about how to make [HECM] economically viable over time,” he says. “I think that’s where you need to focus so that you can convince the the risk managers at FHA that there’s a model here that is resistant through the cycle, that when home prices go down and interest rates go up, the world is not going to end and that it’s not going to blow the MMI Fund up.”
With that also comes a need for either assurances about the state of HECM right now, or changes to the current program that can get policymakers to a more confident place regarding the program, Parrott explains.