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New Regulations Raise Questions About Reverse Mortgages and MMI Fund

When the Department of Housing and Urban Development announced lower principal limits and higher upfront mortgage insurance premiums for certain reverse mortgage borrowers, officials cited the health of the Mutual Mortgage Insurance Fund as the primary motivator. Without decisive action, HUD said, the Home Equity Conversion Mortgage program would likely need a bailout from Congress to remain viable — a move that insiders have said the department would like to avoid at all costs.

But the HECM and the MMI Fund have had a complicated relationship, and HUD’s doom-and-gloom messaging about the reverse mortgage’s negative impact on the overall pool could renew calls to keep the forward and reverse programs separate.

Strange bedfellows

The Federal Housing Administration has grouped forward and reverse mortgages in the MMI since 2009, using the funds to offset losses incurred by a variety of government-backed borrowers — such as when the value of a HECM borrower’s home isn’t enough to pay back the total bill at loan’s end. 

Each year, an independent firm performs an actuarial audit of the HECM’s impact on the program, and the results have varied widely: For instance, when rolling out the new principal limits, HUD officials repeatedly pointed to the fiscal 2016 report, which found that reverse mortgages cost the fund $7.7 billion — with a projected drain of $12.5 billion by 2023. But the previous year, the HECM fund generated a value of positive $6.8 billion, with the independent actuarial firm projecting a positive value of $13.7 billion in 2022.

These seemingly incoherent swings stem from the HECM program’s increased sensitivity relative to other FHA-backed products, according to Urban Institute researcher Laurie Goodman. Back in 2015, Goodman wrote a report for the Washington, D.C.-based think tank arguing that HUD should remove the reverse mortgage book of business from the fund — and her opinions haven’t changed nearly two years later.

“I think they shouldn’t be in the MMI Fund,” Goodman told RMD. “They have a degree of volatility, due to interest rate changes, that doesn’t really reflect what the MMI Fund is trying to measure.”

She noted that the value of fixed-rate loans will decline relative to other products as interest rates rise, which has happened over the past few years and is expected to continue over time. 

“It’s not going to look pretty over the next few years,” Goodman said.

In addition, subtle changes to the actuarial firms’ modeling assumptions can also have substantial effects on the calculated value of the HECM program, she noted. In the most recent analysis, for instance, auditor IFE Group used updated FHA projections that showed increased property disposition expenses and steeper home sale price discounts — leading to an $8.7 billion hit to the economic value of the reverse mortgage program. 

Forward frustration

As for HUD’s argument that HECM-related payouts have hamstrung the department’s ability to assist younger, first-time homebuyers — which secretary Ben Carson described as the target recipients of FHA assistance when announcing the new reverse mortgage rules — Goodman said the overall volatility of the HECM program might make the health of the forward portfolio difficult to determine.

“It increases the variability and clouds the picture for the forward mortgages, and it might be much harder to see what’s going on with that product,” Goodman said.

Brian Montgomery, the former FHA commissioner who last week received the nomination for a second stint at the position, has also advocated for a separation as recently as last fall, telling American Banker in November that the HECM program should be merged back into the General Insurance/Special Risk Insurance Fund due to “wide swings in the economic value.”

Written by Alex Spanko