Despite improvements, the HECM remains a reliable target of fiscal scrutiny
In its Fiscal Year, 2020 Financial Report the Department of Housing and Urban Development called out the HECM program saying it ‘undermines’ the financial soundness of FHA’s Mutual Mortgage Insurance Fund which backs both HECMs and traditional FHA loans. There have also been repeated statements that the program is being subsidized by traditional FHA mortgages- a claim that has been recently challenged in a recent blog post by New View Advisors writing,
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“We think Forward Mortgage does not subsidize Reverse Mortgage now any more than Reverse Mortgage subsidized Forward Mortgage in 2009. A true subsidy would mean outsized realized HECM losses, and a compelling case that this will continue. This is not demonstrated in the report.” New View concluded by referencing a recent revision to the Actuarial review of FHA’s insurance fund. That revision increased the HECM’s economic net worth in the MMI fund from a negative $5.4 billion to a positive $1.268 billion. That revision was made after Jim Veale- an industry watcher and HECM originator contacted Pinnacle Actuaries in late November. Veale noted a discrepancy between the actuaries calculation of Total Capital Resources of a negative $5.64 billion versus a positive $1.597 billion shown in HUD’s report to Congress. As a result, Pinnacle updated their report which now has added $7 billion dollars to make the HECM’s economic net worth a positive $1.2 billion. This strengthens the argument that the HECM is presently not a drag on the overall FHA fund which backs the program.
Looking back the HUD’s recent annual report released December 4th, one area of concern that rightly deserves focused effort and attention is monitoring the servicers of loans that have been been placed into assignment with HUD. That oversight is crucial as HUD states the majority of losses from Type 1 claims are the result of the borrowers no longer occupying the home as their primary residence (or in some cases even living in the property at all) and the failure to pay property charges such as taxes and insurance. Such instances call for active and prompt intervention by assigned HUD servicing vendors to preserve the economic values of properties, and preventing occupancy fraud- both which stand to substantially contribute to continued and avoidable insurance claims and losses.
HUD Secretary Ben Carson’s comments became somewhat political in the December 9th official HUD press release which accompanied the agency’s financial report which reads in part, “When an institution becomes insulated from the success or failure of its policies, it loses its incentive to operate efficiently. Private businesses, while engaged in different work than the federal government, do not have the luxury of being protected from their failures or maintaining damaging courses of action,” adding, “Irv Dennis was able to accomplish the impossible task of providing the financial stability that had gone left unchecked for so many years.” Keep in mind, January will bring us a new administration and agency heads which are certain to have a direct impact on housing policy and the HECM program.
Setting politics aside much has been accomplished to improve the HECM program since the great recession of 2009. However, merely increasing oversight of lenders. “HUD must strengthen its effort to ensure that the lenders participating in the HECM program comply with its regulatory and administrative requirements and minimize claim costs” reads the agency’s 2020 financial report. With very few notable exceptions, HECM lenders have worked closely with HUD to ensure ethical and efficient lending to today’s older homeowners. Chances are that the largest liabilities to the economic value of the program can be found in the servicing of assigned loans for non-compliant borrowers as mentioned earlier, and reexamining the structural change of upfront FHA insurance premiums charged made in October 2017.
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4 Comments
I not only disagree with the financial report from HUD but I also disagree with the position taken in the commentary of New View Advisors whose position is bolstered by the $7.061 billion error I discovered and got corrected.
I strongly believe that forward mortgage mortgagees did, in fact, overpay their MIP and that such excess will never be refunded to those mortgagees who saw their FHA forward mortgages terminate after 9/30/2008 but before 12/1/2020. I strongly disbelieve that ALL of the forward mortgages in the MMIF subsidized anything since the word subsidized means that the “…government or other authority … pay part of the cost…” [sic] according to Collins (online) English Dictionary. However, due to the large size of the negative total Net Present Values of the Estimated Cash Flows from the HECM Insurance Portfolio in almost all fiscal years since October 1, 2008, the MMIF could not reimburse forward mortgage mortgagees like it would have, had HECMs not been in the MMIF. So while the over payments can be corrected in the near future and rightfully, NONE of the reimbursement will be going to HECM borrowers, former forward mortgage mortgagees whose forward mortgages terminated after fiscal 2008 but before now.
As to the change to the independent actuaries’ review for fiscal 2020, it would NOT have surprised me if the change had not taken place until March 1, 2021 but due to the concern of the actuaries to get it done right immediately and the superb support of HUD to get to the bottom of it right away, the report was corrected and posted on the HUD website within 9 days of my correspondence to the actuary at Pinnacle who is responsible for the fiscal year 2020 independent actuarial review of the HECM portion of the MMIF. In California in comparison, it is impossible to go from getting a HECM counseling appointment through closing in 9 days.
Seeing the correction made so swiftly, I commend all involved for their expeditious actions. This could have been resolved two days earlier if I had not hesitated in thinking that I could not possibly be right because someone else would have caught this error in the prior ten days (that is after the original independent actuaries’ review on the HUD website. I believed the change needed to occur so quickly that I did not consult anyone else in the industry including NRMLA. Time was of the essence and I believe that the results speak for themselves. I did tell some industry participants about my actions in the first few days after emailing Pinnacle (the name of the independent actuaries’ firm). However, once I was told the result, one of the very first people I called was Steve Irwin who was very surprised but seemed pleased that the whole thing was done without putting any burden on NRMLA. In fact, several of those I informed about the changed report thought I was asking for help to get it done. Again, other than pointing out the problem, it was the actuaries and HUD that were so swift in getting the original independent actuarial review corrected and posted on the HUD website. The industry owes those responsible for getting the change done, a debt of gratitude for doing the right thing in the quickest manner possible.
So that everyone is clear, the actuary and I became acquainted due to the encouragement of Peter Bell and Steve Irwin back in 2017. In a phone call, they agreed that certain problems I found in the Pinnacle needed to be addressed even though they were not crucial to NRMLA, so Peter and Steve approved my contacting the actuaries without the help of NRMLA. My action last month was based on that earlier conversation. I wish to commend both Dan Hultquist and Shannon Hicks in being my practice sounding boards in 2017. To the much smaller changes that I believed needed to be changed on the fiscal year 2017 actuarial review, the actuaries also agreed. Having previously greased the skids back in late 2017 made my communication with the actuaries in late 2020 simple and direct.
Again thanks to Pinnacle and HUD for working together to get the change made and posted as soon as humanly possible especially when one of those nine days was Thanksgiving Day.
And a very special thanks to Shannon for making the error and change as clear as humanly possible.
I’m not familiar with the details of the calculations, but it seems clear that the HECM MMI fund has gone from seriously negative to a positive number in only three years. This tells me that current HECM borrowers are paying too much for mortgage insurance.
Yes, there are many problems with the way HECMs are originated and serviced. Many have to do with the fact that the people making the rules are too young to fully understand the issues of HECM borrowers. At 74, I’m becoming more sympathetic to the difficulties my borrowers are dealing with. People who are 20 have no more idea of what it’s like to be 60 than people who are 60 have any idea what it’s like to be 100. I’ve originated more than one HECM for people over 100 years old. Many will be over 100 before they leave their home. I had a recent discussion with a leader of the industry who assured me he understood. It was clear to me that he didn’t understand. The leaders of the industry have no comprehension of the fact that demands that may be reasonable of a 40 year old or 60 year old, may not be reasonable for a 90 year old or 100 year old person. These older people need some understanding, compassion, and help not threats of foreclosure and the abuse that is all too common today.
It seems clear that some would prefer to shift the reverse mortgage loans to private lenders or at least reduce HUD’s exposure to the product. The reality is that a reverse mortgage line of credit or monthly payments does not work for the borrower without a federal guarantee. Without a federal guarantee, it becomes just another HELOC which can be shut off at any time with no notice, just when the borrower needs the money. Forcing a borrower who can qualify for a loan at age 90 to requalify at age 100 doesn’t work for the borrower. The most important feature of a reverse mortgage is the borrower being able to qualify for the loan one time and have money available either as a line of credit or monthly payments for as long as they live in the home. No proprietary product can meet this requirement because if the lender goes broke, the borrower loses access to the funds when they need them most. A HECM line of credit at its core is an insurance policy for the borrower against an unexpected future financial crisis. The borrower must know that when the bank fails, they still have access to the funds. I want to be confident that when I am dead and my wife needs money 30 or 40 years from now, it will be available from our HECM even if the lender is out of business.
Mr. Veale deserves great credit and appreciation for his work to identify this actuarial mistake.
Brien,
Thank you,
Jim Veale