Why change was essential
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If you question the need for the recent changes to the Home Equity Conversion Mortgage program consider this recent statement by FHA Chief Carol Galante. “If not for HECM losses, FHA’s capital reserve would have been positive by at least $3 billion.” FHA has been under increased scrutiny from both houses due to losses to its insurance fund in the wake of the housing crash. For the first time in history the agency requested a 1.7 billion dollar cash infusion to bolster it’s insurance fund stemming primarily from losses in the years 2006 through 2009. The bitter taste remains fresh in for lawmakers who faced massive bailouts of housing giants Fannie Mae and Freddie Mac a few short years ago. Hopefully lawmakers will keep in mind that the bailout is not the only historical first. Since FHA’s creation we have never seen a record decline in home values coupled with …
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4 Comments
Since congress approved the Mark to Market accounting rule destroying the lenders capital requirement and causing thousand of lender went out of business all at the same time. The panic over reaction in the financial markets by the sleeping regulators killed the Wall Street source of capital leaving us with only FHA loans. Two years previous to the closing no one was even doing a FHA loan. Just as FHA loan pulled us out of the great depression FHA is now the only money source for home loans. We now have the Fed’s being the only one buying MBS’s because there is no private secondary market. The new over regulated qualifying conditions for FNMA & Freddie is so costly to originate they are not profitable anymore. Until the private secondary investment market returns we are stuck with 100% government run mortgage business whether congress likes it or not. They have them selves to blame. 30 days after congress passé the Mark to Market rule congress realized they made a catastrophic blunder and reverse the rule but it was too late the damage was done,
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HUD did not ask; it simply exercised its legal right to take $1.685 billion out of the US Treasury last month. That was a substantial increase from the estimated $943 million HUD had projected it would need just about six months ago.
Per the written testimony of the Commissioner, the reason for the increase is interesting in that it is not all about HECMs. In fact HECMs are projected to do about $98 million better than projected just a few months ago. The first estimate was that the net position of the HECM portion of the MMI Fund would be $5.249 billion negative but is now being projected as $5.151 billion negative. It is the forward portion of the MMI Fund which is looking worse at a positive $3.466 billion now versus $4.306 billion positive a few months ago; that is a drop of $840 million. So adding to the original $943 million needed another $840 million (for forward mortgages in MMI Fund) and deducting $98 million (for HECMs in the MMI Fund) we come to the $1.685 billion which was actually taken from the US Treasury. So why was it that the Commissioner did not explain it this way when answering questions? Who knows? (You can read her testimony at: http://financialservices.house.gov/uploadedfiles/hhrg-113-ba00-wstate-cgalante-20131029.pdf .)
But now we need to look at it from the perspective of Congress. In November last year, HUD was pointing to the actuarial report for last fiscal year declaring that with no change to HECM Standards the HECM portion of the MMI Fund would improve by $131 million from a negative net position as of 9/30/2012 of $2.799 billion to a negative $2.668 billion as of 9/30/2013. Then a few months later HUD was saying that the HECM portion of the MMI Fund was going from a negative $2.799 billion as of the end of fiscal 2012 to a negative $5.249 billion as of the end of last fiscal year. Congress is lost as are most of us and FHA is not explaining what is causing this. Can Congress believe anything HUD tells them about HECMs? It always seems to change by radical amounts.
Then in spoken testimony we heard the same old lines about the problem is in the loss in home values from the 2006, 2007, 2008, and 2009 book of business. Yet the HECM portion of the MMI Fund only accounts for HECMs endorsed after 9/30/2008!! Also in the midst of higher home values throughout fiscal 2013 and the loss of the fixed rate Standard half way through it, why is HECM negative net position rising by $2.352 billion to $5.151 billion as of the end of last fiscal year by the latest estimate?
The Commissioner never answered most basic questions or even bothered to made the simplest of explanations as to why HUD needed the additional $742 million that was indicated in the 2014 Budget. Until the Commissioner is more direct with Congress, the answer right now will be Section 292(a) of the PATH Bill (HR 2767), end the HECM program within two years of enactment of PATH.
As it has done for generations, the federal bureaucracy is scapegoating those least able to ward off the attack. To borrow a phrase out of our Native American folklore, FHA Housing Czar Galente continues to speak with a forked tongue.
If we return to the 2008 arrangement when forward and reverse MI accounts were segregated, and then performed an audit free of HUD’s heavy hand, we would likely see a vastly different picture. The red ink may not disappear altogether, but there would certainly be no need for Galente’s Chicken Little routine.
Changing the name on her door should be the first priority.
Jon,
I am no admirer of Commissioner Galante (correct spelling); however, that I believe she is doing what she believes her duty is. I just do not agree with what her idea of what it is she should be doing.
Since when was the HECM program ever separated from forward mortgages. That is false and very misleading. Before October 1, 2008, all HECMs were accounted for in the General Insurance Fund rather than the Mutual Mortgage Insurance Fund (not the MI accounts). You certainly show no comprehension as to why the Democrats in Congress wanted all future HECM endorsements to be accounted for as MMI Fund mortgages when they passed HERA in 2008.
Your comment is so frivolous that it detracts from a meaningful discussion of how the Net Position of the HECM portion of the MMI is computed and why HECMs have not been able to achieve their portion of the 2% capital reserve requirement and will not be able to do so for at least a decade and realistically far longer. The problem lies in the 3.9% plus home growth assumption used in the HECM model and the false assumption that MIP is sufficient to offset losses over time; the trouble is the model was not designed with the extreme recession we just went through in mind.
It is your kind of comment that hurts the image of originators not only with those in Congress but with those who are not in the industry but have some idea that the HECM program as it existed on 9/29/2013 is harming other programs at FHA which indeed it is.