After substantial Home Equity Conversion Mortgage program changes implemented last year, the Federal Housing Administration (FHA) doing “triage” to assess, manage and improve the agency’s reverse mortgage loan portfolio.
Having held roughly a month at the helm of the FHA, Commissioner Brian Montgomery says the agency is strongly focused on maintaining the health of the agency’s insurance fund, and its reverse mortgage program in particular.
In a call with members of the press Tuesday, Montgomery expressed concerns about the FHA’s technology backbone, the administration’s market share of the nation’s single-family mortgages, and the HECM program, which he noted has led to a negative $14.5 billion strain on the Mutual Mortgage Insurance (MMI) Fund, according to recent annual actuarial reviews.
But the program itself has value, he said, for seniors to age in place, and the agency is currently in “fix-it mode” to help right the program.
“We are digging deep in the portfolio to find out of the problem is on the front end or the back end,” Montgomery said. “My sense is that it’s more on the back end in terms of the losses we are experiencing. Part of ‘triaging’ is [determining] why that is happening.”
Program fixes, past and future
The commissioner was confirmed by the Senate in May after being appointed by President Trump in September and previously serving as FHA commissioner under the George W. Bush Administration from 2005 to 2009. He since has served as vice president of the Collingwood Group, a Washington, D.C.-based advisory firm, which was acquired by real estate strategy and tech company Situs in 2017. As in his previous role leading the FHA, he maintains his commitment to reverse mortgages and fixing the program, he said.
“I have been a strong advocate of the reverse mortgage program,” he said, noting the lack of government assistance for senior homeowners who face income challenges. “This program allows seniors to age in place, which they want to do. It’s the best kind of program [in that it offers] assistance you pay for yourself…It’s up to us to fix it for the long term.”
Recent program changes, including a reduction in principal limit factors (PLFs) for most borrowers and insurance premium change implemented in October, however, have cut deeply into reverse mortgage volume, according to recent reports. Based on June data from the Department of Housing and Urban Development, analysts at Reverse Market Insight reported that with monthly volume at 2,838 loans, that tally has fallen to a level not seen since 2005.
Further changes to the FHA’s reverse mortgage program could be coming but the agency is sensitive to how they could impact the market and availability of the product, Montgomery said.
“We need to find that tipping point,” he said. “If you make further changes to [principal limit factors], pricing changes, what is the tipping point to where volume drops, and there are impacts to the [HECM mortgage-backed securities]. I am very mindful of that, but looking at the back end of the process, once the loans are assigned to HUD is the area we are focused on. I am not sure further [principal limit] cuts are going to fix that problem.”
Home Values Under the Microscope
One area the FHA will be examining with respect to reverse mortgages is appraisals. After examining the HECM portfolio under Montgomery’s leadership to date, appraisals have emerged as an area of concern.
While not expressing an opinion, Montgomery explained that because HECM properties tend to depreciate more than average properties, inflated appraisals among those properties can lead to twice the “pain” for FHA.
“We are doing heavy triage on the forward book and on the reverse book,” he said. “We have spent considerable time in the last few days ‘triaging’ the HECM portfolio looking for deficiencies and areas of concern. There is one area in particular we are going to hone in on. That is appraisals.”
The agency plans to compare existing appraisals with Automated Valuation Model estimates (AVMs) as a means toward that goal, both for forward and reverse mortgage loans in the agency’s portfolio.
Rebuilding a private market
In recent months, the reverse mortgage industry learned about several new private product launches, as well as a shift among the private product offered by Finance of America Reverse (FAR). Not designed to be a 100% market player, the FHA welcomes the prospect of new private products, Montgomery said.
“I don’t think it was ever envisioned to be 100% of the market,” he said of the HECM product. “I think folks would like to see that expand; I would like to see the market expand. There are some proprietary products out there, but we pretty much dominate the market right now.”
Quipping that it has been a very busy 32 days at the helm of the FHA, Montgomery pointed to a bright future for expanding homeownership and improving operations at HUD—particularly with respect to the agency’s technology infrastructure. FHA plans to hire substantially in the coming months toward that effort, as well as target possible collaborations and economies of scale with other agencies.
“It’s not necessarily wanting to expand market share,” he said. “But if we are going to be there for generations to come, we have to address technology and I will do everything I can to fix that.”
Written by Elizabeth Ecker