What you need to know about FHA’s Report to Congress on the Home Equity Conversion Mortgage
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Each year reverse mortgage lenders, originators and other mortgage market participants eagerly await the release of the Federal Housing Administration’s report to Congress on the financial status of the Mutual Mortgage Insurance Fund.
The good news is that the valuation of the HECM portion of FHA’s portfolio improved by over 50% in a single fiscal year from a negative valuation of -$13.63 billion in 2018 to a negative $5.92 billion in 2019. Why are we seeing such a rapid and marked improvement?
The comments of FHA Commissioner Brian Montgomery during a press call last Thursday may shed some light. “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.”
1 Comment
As a skeptic by training, I have far less confidence in the HUD estimates than the vast majority of the industry. They are great for PR purposes with Congress but will they hold up over time? The rest of his comment takes into account the far more conservative swing as presented by HUD’s actuaries. My conclusions tend more towards those same numbers as estimated by the actuaries; however, I believe that comparing the difference between the net present value of the future cash flows (NPVOTFCF) for the HECM portfolio in the MMIF 1) as reported by HUD and 2) as presented by HUD’s actuaries to the Insurance in Force makes the likelihood that the NPVOTFCF as reported by HUD will be determined to be reasonable by the actuaries, too likely. The rest of this comment focuses on the economic net worth of the HECM portion of the MMIF and the NPVOTFCF of the HECM portfolio in the MMIF (both as of 9/30/3028 and 9/30/2019) as estimated by HUD and by HUD’s actuaries.
While the HUD Annual Report to Congress on the Financial Status of the FHA Mutual Mortgage Insurance Fund as of September 30, 2019 mainly focuses on its largest component, forward mortgages, there is interesting information on the HECMs in the MMIF as well. Without the egregious “help” of FHA Commissioners under the Obama Administration (other than FHA Commissioner Montgomery), the economic networth of the HECM portion of the MMIF should have been negative for each each September 30 following October 1, 2008. So all of this talk of wild swings in that value is due to inappropriate adjustments to the results from operations since 10/1/2008 as made by those specific FHA Commissioners under President Obama (other than Commissioner Montgomery who left the Obama Administration before September 1, 2009). For those who may not know, that egregious change was an adjustment to the operating results from HECMs by an arbitrary amount transferred from the forward mortgage capital reserves to make the losses for those years lower than the amounts estimated.
Thank goodness for the Annual Actuary Review (of the HUD Annual Report and thus) of the HECM Portfolio in the MMIF for fiscal 2019. The economic net worth per the actuaries as of September 30, 2018 was a negative $12.1 billion while HUD reported the same amount as a negative $13.6 billion. However, the actuaries reported the economic net worth as a negative $9.5 billion as of September 30, 2019 while HUD reported the same amount as only a negative $5.9 billion. While the swing from fiscal year 2018 to fiscal 2019 was only $2.6 billion as reported by the actuaries, it was $7.7 billion as reported by HUD.
Why is the swing so high with HUD and almost one-third that amount as estimated by the actuaries? HUD reports a swing in the economic net worth of the HECM portion of the MMIF that is greater than its ending balance as of 9/30/2019. Why?
If the actuaries were reporting on a comparison of the swings in the economic net worth of the HECM portion of the MMIF as of September 30, 2019, 1) as reported by FHA and 2) presented by HUD’s actuaries, the conclusion in the review might read much differently. Their review focuses on the difference between the NPVOTFCF of the HECM portfolio in the MMIF as estimated by HUD to their own estimate. Due to the components in the economic net worth, the swings from its swings for each fiscal year are identical to the swings from the NPVOTCFC for the HECM portfolio in the MMIF. We also know that the differences between the estimated economic net worths calculated by HUD and the actuaries is the same as the difference net present values for the future cash flows of the HECM portfolio as estimated by HUD and the actuaries.
The actuaries must present on the net present values of the future cash flows of the HECM portfolio in the MMIF and how it differs from that same amount reported by HUD. That difference in fiscal 2018 was a negative $1.5 billion or 2% of the Insurance in Force as of 9/30/2018 which was $72.3 billion as of that date. Last fiscal year, the difference rose to $3.6 billion and based on $64.2 billion of Insurance in Force as of September 30, 2019, making the difference 5.6% for fiscal 2019.
While the actuaries show no obvious signs for concern in this $5.1 billion swing from fiscal 2018 to fiscal 2019, it nonetheless is troubling. Why would HUD have a $7.7 billion swing in its economic net worth estimate while their actuaries only have a $2.6 billion swing.in that number over the same time period? Did the actuaries follow their conservative tendency on home appreciation rate and interest rate assumptions while HUD was aggressively trying to find home appreciation rate and interest rate assumptions that would make the economic net worth look better without their actuaries calling their assumptions into question? That could be. But why not do that every year? Could it be that the meetings with Congress last fiscal year were brutal enough to encourage riskier assumptions by HUD?