Can recent HECM reforms ever repay the losses of the past?
An honest examination of the reverse mortgage would recognize that many loans originated prior to 2013, could easily become a future liability. Case and point the now defunct ‘Standard Fixed Rate HECM’. Introduced in the midst of an overheating housing market. With needs-based borrowers comprising a significant portion of HECM loans taken, the seeds of trouble sown came to fruition as housing values plummeted, causing many of these loans to ‘cross-over’ where the outstanding loan balance exceed the home’s value. Subsequent insurance claims spiked.
Complicating matters is the method used to calculate the HECM program’s economic value which swung wildly from a positive valuation of $6.8 billion in 2015, to a negative value of $7.7 billion for the fiscal year 2016.
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Like others, I do not believe that financial assessment will mitigate much loss, if any, in the MMI Fund. For example, the actuaries in their fiscal year 2015 review projected that the fiscal year 2016 HECM book of business will end with about a $0.6 billion positive net asset position. Then in their fiscal year 2016 review projected that the same year’s (2016) book of business will end up with a $1.2 billion negative net asset position. So why didn’t financial assessment in anyway mitigate this $1.8 billion loss difference?difference?
The fact is the losses in the MMI Fund have LITTLE to do with losses from property taxes or insurance (other than those incurred in assignment). There is an argument to be made that if anything foreclosures from the default of property taxes and insurance mitigate MMI Fund losses from terminated HECM losses for other causes since little, if any, MIP is expended in reimbursing termination losses resulting from defaults due to a failure to make property service charge payments but that is the subject for another comment.
The cause of the losses in the MMI Fund from HECMs come first the issue of insufficient collateral. One former HUD official recent is quoted by NRMLA in the September/October 2017 issue of its Reverse Mortgage magazine as saying this is a collateral based loan and questioning why there is financial assessment. She is right. This is not a capacity based loan otherwise it would be a forward mortgage.
So what do we mean it is a collateral based loan? The answer is both HUD and the lender can only look to the home for repayment. So if the appreciation rate on HECM collateral that HUD assumes in its PLF modeling is too high, the MMI Fund will and does, in fact, in many cases suffer loss at termination because the balance due on the HECM at termination was higher than the value of the home at that time. There is little concern by almost anyone that the actual fair market value of the collateral at the time of origination might be materially smaller than the MCA related to the collateral. In this last case, even if HUD got the appreciation rate correct, the beginning value of the home was too small so that again the balance due on the HECM at termination is greater than the value of the home at that time.
Then there is the interest rate used in estimating interest costs. On top of that is the interest rate used in discounting the value of termination proceeds which will be received in the future. If the estimated effective average interest note rates are even slightly too high compared to actual, the negative impact could be very disproportionate. Again if the discount interest rate is too high, the value of cash to be received could be understated creating a larger loss than will be realized.
Another issue that has been questioned in the last few years are the estimates the actuaries use for disposition costs at loan termination which include foreclosure, selling, and fix up costs. Are they overstated? If so, this would again contribute to some degree to an overstatement of HECM MMI Fund losses.
It is unclear if the $15.2 billion total losses attributed to HECM insurance activities since fiscal 2008 on HECMs endorsed after 9/30/2008 are overstated or maybe even understated. It is up to the actuaries to keep refining their estimates as they determine what is happening in the MMI Fund as to HECMs.
I like what Shannon presented today and hope to see that continue long into the future.