Just as we’ve witnessed within the domestic and international banking systems in recent weeks, the rise in interest rates over the past year has claimed a number of casualties in the mortgage finance industry. Forward loan origination volumes have plummeted as borrowers have been squeezed out of the market, spurring thousands of layoffs and consolidation in the sector.
Garnering less attention has been the havoc wreaked in the market for reverse mortgages, or Home Equity Conversion Mortgages (HECMs). The turmoil already resulted in one large HECM lender/servicer going under. If reverse servicers and “issuers” of Government National Mortgage Association (Ginnie Mae) HECM mortgage-backed securities (HMBS), those who are authorized to affix the Ginnie Mae label to securities, are not provided a liquidity lifeline soon, the authors believe there could be additional failures, with Ginnie Mae and possibly, taxpayers holding the bag. Further harm can be avoided if Ginnie Mae provides support and the Federal Housing Administration (FHA) makes some critical changes to its HECM rulebook.
HECMs are almost entirely backed by the FHA and Ginnie Mae, FHA’s secondary market counterpart. Reverse mortgage originations and securities are mostly issued by a small coterie of independent non-banks, approved by those agencies that specialize in the product.
Ginnie Mae and HMBS pressures
For its part, Ginnie Mae requires HECM issuers to purchase HECM loans out of pools when the loan balance, including principal plus any accrued interest and mortgage insurance premiums, reaches 98% of its “maximum claim amount.” If the loans being bought out are current, they can be assigned to HUD and the issuers paid a claim.
However, if FHA considers the loans in default or “due and payable” – frequently because no surviving borrower maintains the property as a principal residence or because the loan is delinquent on taxes and/or insurance – HUD will not accept the assignment until the default is cured. Unlike servicers of HECMs for Fannie Mae (which purchased HECMs until the creation of the Ginnie Mae HMBS in 2009), Ginnie Mae issuers must fund the buyouts and advance tax and insurance payments when the loans are out of the pools, an enormous financial obligation.
The system worked reasonably well for decades, but the steep rise in interest rates has not only hit HECM lenders and servicers with reduced origination volume but it has also meant more HECM mortgages, which are largely floating rate loans, are reaching the maximum claim amount sooner.
The disconnect between the Ginnie Mae and FHA handbooks results in a significant period of time, often as long as two to three years, over which HECM issuers must finance the buyout and then carry these loans. There are limited private label options for HECM loans in default, and less so during high interest rate periods.
This means due and payable/in-default HECMs are largely funded by issuers’ lines of credit with warehouse lenders. As short-term rates rose with unprecedented speed this past year, the expense of carrying HECM loans for a few years quickly became a losing proposition – a significant “negative carry” where the cost of holding the bought-out loans many times exceeded any income earned while holding them.
Moreover, the negative carry on the warehouse line or private label securitization for unassignable HECM buyouts is exacerbated by the fact that the claim amounts accrue at the FHA debenture rate set at the time of origination, unlike on the forward side where buyouts accrue at a debenture rate set at the time the loan was due and payable. HECM loans becoming due and payable that were issued 10 to 15 years ago, in a much lower interest rate environment, create a worse negative carry situation that is impossible to hedge.
A ‘perfect storm’
The perfect storm in the mortgage finance market coupled with the disparity in Ginnie Mae requirements and FHA policy that makes it difficult to assign due and payable HECM loans to HUD has resulted in a serious liquidity crunch. At this point, the ability of lenders to fund buyouts and advance payments is growing more tenuous by the day. Today, the HECM market is at a serious inflection point.
Last month, Ginnie Mae lowered the value of reverse mortgage loans needed to securitize into one of their pools, from $1 million down to $250,000. This may have a noble intention of alleviating pressure from reverse lenders who fund HECM loans before they reach the secondary market. But it will not likely be enough in this market which remains under strain. Unless FHA and Ginnie Mae take additional action, market liquidity could seize up and threaten the future of the program.
To critics of the HECM program, such a fate for HECMs might sound like a welcome development. But letting the program deteriorate and the current book to simply “run-off” would come at enormous cost to Ginnie Mae and potentially taxpayers. It’s not clear what end that would achieve.
Both the Urban Institute and former president of Ginnie Mae Ted Tozer have recommended that Ginnie Mae open the Pass-Through Assistance Program (PTAP). The program was a mechanism put in place while the authors were at HUD in the early days of the pandemic. While relatively few issuers used PTAP during COVID-19, it did help prevent panic by servicers who knew it was there if they needed it—even as a last resort. It was a temporary measure designed for extraordinary circumstances. It is again one such time.
The clock is ticking
Other solutions are on the table as well. FHA could find ways to shorten the time that lenders must carry loans on their books. The agency could make advances when loans are bought out of securities. HUD could utilize loss mitigation alternatives for borrowers which would alleviate the burden of fund advances required of HECM lenders. Or the agency could allow the assignment to HUD of all loans due and payable as a result of the borrower’s death when they reach 98% of the maximum claim amount (circumstances that permit issuers to file a claim).
The intent of the HECM program always has been to ease the financial burden on elderly homeowners facing cost burdens brought on by health or other familial issues beyond their ability to cover on a fixed income. Both Republican and Democratic administrations have viewed HECMs as part of FHA’s larger mission to serve underserved populations, in this case, senior citizens.
The clock is ticking. The longer HUD waits, the more difficult the problem becomes. With the recent failure of a major HECM issuer, Ginnie Mae already now owns — and must determine how to manage — one of the largest HECM portfolios.
In four decades, the HECM program has not cost a single dollar of taxpayer money. It need never do so. Proper fixes and program adjustments will allow this important program to continue serving its public mission for decades to come.
This column does not necessarily reflect the opinion of Reverse Mortgage Daily and its owners.
To contact the authors of this story: Keith Becker, Dror Oppenheimer, and Michael Marshall at GateHouseDC.com
To contact the editor responsible for this story: Chris Clow at firstname.lastname@example.org