The Urban Institute calls for loan servicing reform
Despite the good news last month that the backlog of HECM assignments has been cleared, significant problems remain according to the Urban Institute. “Rather than continuing to narrow eligibility—and decreasing participation further—the FHA should focus on reducing costs. Addressing losses on assigned loans would be the best step in that direction. This servicing issue is one of the biggest drivers of losses in the HECM program.” So begins the Urban Institute’s recent blog post on how FHA could more effectively stem the tide of continuing HECM claims against its insurance fund.
Much like a broken pipe dramatically reduces the reach of other sprinklers in the system, HECM borrower participation, and overall loan volume have been decimated in the wake of several cutbacks to the program in efforts to stem continued losses. The trick is finding where the leak is. Evidently, numerous reductions to the amount of money loaned (PLF factors), the financial assessment, and first-year distribution restrictions have not had their anticipated effect as projected losses continue according to HUD’s annual actuarial reports.
All which leads us to the question where’s the proverbial leak? Nearly one year ago FHA Commissioner Brian Montgomery said of HECM losses, “My sense is that it’s more on the back end in terms of the losses we are experiencing. Part of ‘triaging’ is [determining] why that is happening.”
The Senate Appropriations Committee seems to agree to instruct HUD to improve its resolution of defaulted and foreclosed FHA Home Equity Conversion Mortgage loans that have been assigned to HUD. Today 60 percent of HECM loans are not assigned to the agency. This is often due to tax delinquencies, pending foreclosures, or bankruptcies. Of the 40% of loans ultimately assigned to HUD 42% incur losses or result in an insurance claim, while only 12% for loans still with the loan servicer result in a loss. Consequently, the Urban Institute recommends that FHA’s policies be changed to allow the current servicer to manage the loan even after the loan is assigned.
HUD’s losses may be higher because they are required to pay future delinquent property taxes after the loan has been assigned. However, before a loan servicer can assign the loan property taxes must be current. In some cases, the servicer may pay the current outstanding taxes anticipating future delinquencies, and assign the loan at that time.
For most HECM professionals loan servicing goes largely unnoticed. However, the importance of effective and efficient loan servicing cannot be overstated when it comes to the verification of tax payments, borrower occupancy, and property maintenance. There have been numerous anecdotal reports of HECM properties no longer being occupied by renters or family members long after the borrower has moved or passed away. In other instances, properties are not effectively supervised and become dilapidated decreasing the value of the loan’s underlying security- the home.
Contrary to the Congressional Budget Office’s recent recommendation to assign loans much earlier at 80% of the maximum claim amount versus 98%, the Urban Institute points to a potential source of a significant number of HECM insurance claims. Would this approach fix the leak and once again place the HECM closer in reach for those who could benefit?
Urban’s blog post concludes by stating, “If the FHA were to allow existing servicers to retain the servicing for the rest of the life of the loan, it would stem these unnecessary losses. This is critical to the future viability of this valuable program for seniors.”
2 Comments
Why don’t you do a report on when HUD actually counts it as a loss. Basically it’s a loss as soon as the borrower dies. Then the numbers are updated when the home is sold off. I think if you actually do some investigative reporting you’ll find that the accounting methods make things appear worse than they actually are. And yes, servicing from the government is terrible. The government isn’t good at doing very much period.
Chris
I think you are confused. FHA is an insurance company. They do not account for HECM losses occur by any triggering events. Most of the time the loss is a loss at endorsement, not when ALL borrowers die and all deferrals are triggered or updated when “the home is sold off.” HUD uses a much different accounting method than your comment reflects.
HECMs are accounted for using the methodology of the fund that they belong in. We know that HECMs endorsed after 9/30/2008 are accounted for using an actuarial method. The fund they are governed by is the Mutual Mortgage Insurance Fund in which there are currently about 379,000 active HECMs. On the other hand, HUD does not report the methodology used to report on HECMs endorsed before 10/1/2008 of which there are about 131,000 still active per the 4/2019 FHA Production Report; it is very unlikely those are accounted for on an actuarially determined basis. We can easily find a lot of information about the HECMs in the MMIF but little about those in the G&SRIF. You can find the Production Report at the following URL: https://www.hud.gov/sites/dfiles/Housing/documents/FHAProdReport_Apr2019.pdf
On an actuarially determined basis, losses (if any) are measured in the year of endorsement for all HECMs endorsed in that year. So we already knew as of 11/15/2018 what the initial actuarial determined loss for the HECMs endorsed in fiscal 2018 would be. That loss was estimated at $1.3 billion as displayed in Table 3 of Page 3 in the Fiscal Year 2018 Actuarial Review of the HECM Portfolio in the Mutual Mortgage Insurance Fund which can be found at the following URL: https://www.hud.gov/sites/dfiles/Housing/documents/ActuarialMMIFHECM2018.pdf
So while very few HECMs that were endorsed in fiscal 2018 had terminated by 9/30/2018, the actuarially determined loss on that cohort of endorsed HECMs was determined to be over $1.3 billion. At each fiscal year end, the actuaries will be re-determining the loss until all HECMs in that cohort have terminated. The same is true for the fiscal year 2009 cohort, 2010 cohort, etc. As in accounting, losses must be recognized as soon as they can be reasonably estimated.
Since HUD accounts for terminations in mass with all other HECM MMIF revenues and expenses and not individually by the related collateral, all recovery receipts from REO activities are recorded in one account, expenses related to costs of holding REO are all recorded in one account, loss reimbursements in one account, total MIP for all properties accrued in the fiscal year in one account, etc. These are temporary accounts that are closed out each fiscal year to a HECM capital reserves account. Thus without a great effort, HUD does not know the positive or negative cash flow from property A versus property B. Its accounting does not lend itself to that type of analysis. This is why in part HUD needs more up-to-date computers which are capable of handling specific identification accounting.
I think you can see, I do not like the system FHA uses but it is what it is. Over the years those with some understanding of accounting have stated their dissatisfaction with the system.
Perhaps your opinion on when HUD accounts for losses is applicable for the HECMs in the G&SRIF. We can all dream.