During testimony before the House subcommittee last week, David Stevens, FHA Commissioner, said bringing private capital back into the mortgage markets is a critical component to further recovery of the broader economy.
“This administration believes that the current level of government support for housing finance is unsustainable and unacceptable for the permanent state of this market because it exposes taxpayers to far too much risk,” said Stevens during the testimony.
The reliance on government-assisted financing couldn’t be greater. Fannie Mae, Freddie Mac, FHA and Ginnie Mae collectively insure or guarantee more than nine out of every 10 new mortgages. “We do not want FHA to have such a substantial share of the market—and we are very aware of the risks this elevated role poses,” said Stevens.
Rather than support the entire mortgage marketplace, Stevens said FHA aims to bring back its traditional role as a targeted provider of mortgage credit for underserved low and moderate-income Americans and first-time homeowners. “We will shrink the government’s oversized footprint in housing finance and help bring back private capital to the mortgage market. Central to this effort is winding down Fannie Mae and Freddie Mac at a deliberate pace that doesn’t pose further risk to taxpayers, jeopardize recovery in the housing market, or constrain families’ access to mortgage credit,” said Stevens.
Fannie Mae’s role in the reverse mortgage business has already been greatly reduced. The GSE’s market share of purchasing HECM loans fell below 1% in the third quarter of 2010, down from 90% during the first quarter of 2009. The initial pullback caused some pricing problems, but in the long run, the growth of Ginnie Mae’s HMBS program has brought lower costs to consumers and has been a boost for the industry. The last connection to Fannie Mae is its reverse mortgage portfolio, which totaled $50.8 billion as of September 30, 2010.
If FHA decided to shrink its share of the reverse mortgage market, it would be significant. Today, analysts estimate the agency insures 99% all reverse mortgages closed. When RMD asked whether FHA’s decision play a smaller role in the overall mortgage market would impact the HECM program, a spokesperson for the agency declined to comment. If Congress follows the request of FHA to let the higher loan limits expire on October 1, 2011, it could help bring proprietary products back and slowly start to lower FHA’s reverse mortgage market share.
Proprietary products or jumbo reverse mortgages previously met the needs of borrowers with higher home values, but disappeared when the housing market collapsed. Temporarily, FHA stepped in and raised the loan limits to $625,500 for the HECM program. Since then, FHA’s share of HECM endorsements with loan amounts over $417,000 has grown to 18.5% of volume in 2010 according to data form Reverse Market Insight.
By letting the loan limits fall from $625,500 back to $417,000, FHA could tempt lenders to re-introduce jumbo products. But the reality is that even with higher loan limits, Generation Mortgage released the first jumbo product last year. The product caters to borrowers with homes worth more than $1 million and signals that lower loan limits might not be necessary.
Most would agree that lowering the loan limits is a step in the right direction, but Michael McCully, partner at New View Advisors, told RMD it will take more than lower limits to get the private market moving again.
“There’s sufficient regulatory uncertainty in the markets, both prospectively and with current modification/foreclosure changes to prevent a robust market returning anytime soon,” said McCully. Tough underwriting standards and investor requirements are also being challenged by the low interest rate environment and pose a threat to private products returning, he said.
In addition, uncertainty over home prices are keeping lenders on the sidelines. “Strong empirical data supporting widespread and consistent nationwide home price appreciation will go a long way to restart the mortgage markets,” said McCully.
According our sources in Washington, D.C., seeing lower loan limits come back to $417,000 is a possibility and reverse mortgage lenders are looking at the opportunity to re-introduce jumbo products.
“Our clients have been actively assessing how a reduction in lending limits to $417,000 would impact HECM volumes and their ability to offer proprietary products,” said John Lunde, president of Reverse Market Insight. “Releasing a jumbo is the obvious first reaction to a HECM loan limit reduction, but the 417-625 crowd wouldn’t likely see any benefit because of the lower LTVs associated with private products.”