The reverse mortgage portion of the Federal Housing Administration (FHA) Mutual Mortgage Insurance Fund (MMIF) continues to stand at a negative capital ratio on the overall government-backed portfolio, according to an annual actuarial review of the fund’s finances released Thursday morning. However, it has made notable progress over the past year, increasing $7.7 billion in value and marking a 50% increase in the HECM portfolio’s capital reserve ratio.
“This report is welcome news,” said FHA Commissioner and Acting Deputy Secretary of the Department of Housing and Urban Development (HUD) Brian D. Montgomery on the HECM program’s performance in FY 2019 in a press release. “The improvements we’ve begun to put in place in the last two years to stem the losses of the reverse mortgage portfolio, aided by favorable economic conditions, are contributing to some improvements in our reverse mortgage portfolio.”
The 2018 value of the HECM portfolio stood at -$13.63 billion, and has grown in a positive direction to -$5.92 billion this year, with the overall FHA MMI Fund capital ratio for FY 2019 at 4.84%, the highest level since FY 2007, according to HUD. This report indicates a positive shift in the health of the HECM book of business, according to Montgomery.
Additional changes possible
Commissioner Montgomery added that while FHA is encouraged by the latest results for the HECM portfolio, additional changes to the reverse mortgage program are still potentially on the table in order to improve its standing even further.
“We are considering some other changes [to the HECM program],” Montgomery said in response to RMD on a call with reporters Thursday morning. “I don’t think we ever envisioned that the FHA reverse mortgage product would dominate the market for now, almost 30 years. I know there have been some proprietary products that have grown in the industry.”
The addition of proprietary reverse mortgage products can play a role in further stabilizing the HECM program in order to accomplish part of FHA’s mission, Mongtomery added.
“We want the private industry to help serve that market, as well,” he said. “It’s a vital part of FHA’s mission to help the elderly. So, we look forward to working with the industry and other stakeholders, consumer groups, senior groups and similar stakeholders as we move forward and continue to get this program in a better position.”
The strength of the economy and actions taken by the president are also responsible for the health of the fund, according to HUD Secretary Dr. Ben Carson.
“The financial health of FHA’s single-family insurance fund is as sound as it has been in over a decade,” said Carson in a statement. “We have a strong economy with nearly full employment due to President Trump’s leadership, and this economic growth helps set the foundation for ongoing improvements in our FHA portfolio.”
At the end of fiscal 2019, the Home Equity Conversion Mortgage (HECM) capital ratio, a measure reported to Congress by HUD and endorsed by actuarial firm Pinnacle Actuarial Resources, was estimated to be -9.22%. While this is still negative, it marks a notable increase from the -18.83% ratio observed in fiscal year 2018.
The fiscal condition of FHA’s forward portfolio is marked by an economic net worth of $66.6 billion and a capital ratio of 5.44%, an improvement over fiscal year 2018.
Industry response
The performance data for the HECM portfolio in the report is encouraging to the National Reverse Mortgage Lenders Association (NRMLA), according to a statement the association shared with RMD.
“We are pleased to see that the recent changes to the HECM program are having their intended effect of continuing to improve the HECM performance within the MMI fund,” said Steve Irwin, EVP of NRMLA in an email to RMD. “There have been significant strides made, as detailed in the improvement in HECM Capital. We look forward to continuing our discussions with the Department regarding additional program enhancements which may further bolster the HECM performance within the MMI fund.”
The continued growth of the MMI Fund is encouraging to Robert D. Broeksmit, president and CEO of the Mortgage Bankers Association (MBA). While the growth is encouraging, FHA should continue to take steps to ensure that the health of the forward mortgage program is not adversely affected by the HECM book of business, he said.
“We encourage HUD to closely monitor risks to the Fund, including the layering of risks that could contribute to future defaults, as well as oft-cited challenges associated with the HECM program,” Broeksmit said in a statement. “MBA urges HUD to continue to address ‘extreme risk layering’ quickly to protect the core of the program, while also exploring ways to ensure that premium levels for forward mortgages are not adversely impacted by the challenges in the HECM program.”
Recent history
Previous years’ performance of the HECM portfolio within the MMIF have led to numerous recommendations from people within both the public and private sectors to remove the HECM portfolio from the MMIF, with Urban Institute researchers recently saying that the major differences between the forward and reverse books of business justified a different home for the HECM portfolio.
“I think HECM should be moved out of the MMIF, and leaving them in does a disservice to both programs,” said Laurie Goodman of Urban in a House hearing dedicated to the HECM program this past September. “They’re very, very different, and each program should be advised on their merits.”
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. Commissioner Montgomery expressed optimism about the effect that these changes were having when speaking to the reverse mortgage industry earlier this year.
“These changes will help assure the viability of the HECM program going forward,” Montgomery said in May. “Most recent financial estimates are encouraging, showing that the effect on the MMI fund is improving.”
Written by Chris Clow and Elizabeth Ecker
