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Project 2025: FHA and HECM program recommendations from a familiar name
Project 2025 came to prominence during the Presidential election. It’s a conservative blueprint from the Heritage Foundation for restructuring the federal government and its various agencies. The 922-page document outlines various recommendations for reshaping how agencies would function under a conservative government. If the Trump administration adopts portions of the plan it would bring significant shifts for HUD, the Home Equity Conversion Mortgage (HECM) program, and various other government agencies.
Throughout his campaign, President-Elect Trump distanced himself from Project 2025 stating on Truth Social, “I have no idea who is behind it. I disagree with some of the things they’re saying and some of the things they’re saying are absolutely ridiculous and abysmal. Anything they do, I wish them luck, but I have nothing to do with them”.
It wasn’t until after the Presidential election that I downloaded and began parsing out Project 2025’s recommendations for housing policy. Scrolling through the table of contents it came as a surprise to find that none other than Trump’s former Secretary of Housing and Urban Development Ben Carson wrote the chapter on reforming HUD and federal housing policies. This points us back to last week’s show where we explored what the HECM program may look like under the President’s second term and possible candidates to lead the agency. Hopefully, the President-Elect will appoint a HUD Secretary with extensive housing policy experience which was not the case with Dr. Carson.
[Read Project 2025]
Here’s a snapshot of the policies that would impact HECM lending if adopted.
First, Dr. Carson recommends removing the HECM from the Mutual Mortgage Insurance Fund (MMIF). Today the MMI fund insures both traditional and HECM FHA loans. The HECM was moved from the General Insurance fund into the FHA’s larger MMIF in 2009. Separating the HECM from standard FHA-backed mortgages, could alter risk management and potentially increase scrutiny of the HECM’s principal limit factors, HECM limit, and insurance premium structure.
And speaking of insurance, Carson proposes in Project 2025 that FHA should increase mortgage insurance premiums for all loans that exceed a 20-year term. His rationale is that wealth-building and homeownership opportunities are accomplished best with shorter-duration mortgages. If implemented, hopefully, the HECM premiums will avoid such an increase as the average lifespan of a HECM from funding to termination ranges from 5 to 10 years.
How about loan limits for FHA and HECM loans? Dr. Carson recommends revising how loan limit determinations are made for all FHA loans. Experience has taught us that revisions are often synonymous with reductions.
Echoing similar comments made during the first Trump Administration Carson’s contribution to the document says Congress should also consider those areas in which federal policy negatively interacts with private markets, including when federal policy crowds out private-sector development and exacerbates affordability challenges that persist across the nation. Does this mean a curtailment of FHA-insured loan limits or how the Federal Housing Finance Agency determines conforming loan limits which in part establish the HECM limit? During Dr. Carson’s tenure, there was a discussion of how the administration hoped for a more robust private reverse mortgage market.
The good news is that Housing Wire reports the housing advocates who spoke with them cast some doubt on whether the policies outlined in Project 2025 would be pursued. Nevertheless, now is the time for our industry to impress upon the incoming Trump administration the importance of the HECM program and that another severe curtailment of loan proceeds could make the problem largely inaccessible to older homeowners who are facing increasing financial pressures in retirement.
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Shannon Hicks
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
2 Comments
I find this article interesting in that it explains how misguided the people controlling the HECM program are in my opinion. The general assumption is that losses can be controlled by manipulating underwriting guidelines, principal limits, and mortgage insurance rates. From my observation, this assumption is completely false.
One consideration is that this is a loan on what should be assumed to be the last mortgage on the borrower’s last home. I assume the typical borrower wants to stay in their home until they are either forced to move to some form of assisted living or die. When this occurs, a significant percentage will be “elder orphans”, a person living without close family that can provide support. A quick Google search showed me that 20% of people over 65 are or are at risk of being elder orphans. I don’t know if the number is exactly correct, but it makes the point that this affects a significant portion of the HECM borrower pool.
If a person dies at home as an elder orphan, FHA expects a dead person to sell the home and pay off the mortgage. I suggest this is not likely to happen. FHA has no mechanism for an orderly preservation and sale of the property in this case.
FHA expects the same if an elder orphan is moving to memory care. They expect a person with dementia to sell the home and pay off the loan. I suggest this is not likely to happen, so the property ends up in foreclosure.
Another issue that falls in the same category is that as the HECM borrower nears end of life, their financial resources are likely to run out, moving them to Medicaid. A HECM borrower who qualifies for Medicaid while living in the home is put in a difficult position when moving to assisted living. If they sell the home and recover equity to pay for care, they lose Medicaid eligibility. If they don’t sell the home when moving to a community, Medicaid will pay, but the home will likely be foreclosed. The abandoned home becomes a target for vandals, squatters, drug operations and other activities that create HECM losses. FHA gives no consideration of these issues. They leave it to people with no heirs and no plan to payoff the loan.
Medicaid provides support for physical deterioration, but I can find no agency or program that provides support for the common cognitive decline that is common as we age. President Biden and Mitch McConnell are two high profile examples. There are many more. When the HECM borrower is unable to properly deal with their finances, taxes, insurance and maintenance are not paid. FHA refuses to recognize these changes in the borrower which can cause losses. The solution is not changing underwriting guidelines. The solution is having servicers and others that can provide support for an orderly transition.
In addition to the above obvious issues, HECM borrowers are subject to deteriorating hearing and vision issues as they age from 62 to 102. My oldest borrower was 104 when she obtained the loan. People like Dr. Ben Carson who have not experienced this decline don’t really understand what the HECM borrower is dealing with.
When a borrower dies with a HECM in place, Medicaid estate recovery rules make the process of selling the home difficult. In 2023, one of our borrowers died and the property transferred to son instantly with a beneficiary deed. When we ordered title work, the tile company would not insure title for four months because of an unknown Medicaid claim. Medicaid refused to provide any information about the existence or amount of a claim. In this case, we could document the borrower was not on Medicaid. If the borrower was on Medicaid, it could easily mean the property was over encumbered by the combined mortgage and Medicaid liens. It wouldn’t matter if the loan was a HECM or other mortgage because a Medicaid lien can over encumber a home without a mortgage. If heirs understand the interaction of Medicaid with a mortgage, it is often a prudent business decision to abandon the home to foreclosure. Why does FHA think a dead person would be concerned about damage to their credit rating as a result of a foreclosure?
Some at FHA think one answer to losses is to promote non-FHA reverse mortgage products. Unfortunately, without the federal guarantee, a HELOC is a much less expensive option for borrowers that can qualify. For borrowers that cannot qualify, selling the home, spending the money, and moving to subsidized housing is a more attractive option, but also more costly for the tax payer. This option is an opportunity for low-income tax payers to subsidize rich landlords because subsidized housing programs routinely cause rents to be higher. Subsidized housing programs allow low-income renters to live in higher cost cities that they could not otherwise afford to live in. Who wouldn’t want to live in a nicer home while someone else paid all or part of the rent? I understand the concern for people who cannot afford rent, but the concerned people should be willing to pay for the help they want to provide voluntarily. Forcing others to pay for housing the payers can’t afford is not much different than forcing people who have no college debt to pay for other’s debts.
The above are just some of the more obvious issues I see that cause losses for the FHA HECM program. These issues cannot be addressed with changes to principal limits, underwriting guidelines, or mortgage insurance rates. Some can be addressed with changes as simple as asking the borrower “Who will handle your affairs when you can’t?” The persons named should be part of the counseling process so they know what will be required. Currently, FHA gives no consideration to this issue.
The interface between HECM products and Medicaid is a bit more difficult, but something as simple as Medicaid providing a monthly statement to the patient showing the size of the potential estate recovery claim would be very helpful. The patient, their heirs, or others could be better prepared if they had an idea of the size of the potential claim.
In many cases, heirs, and particularly heirs of Medicaid recipients lack the financial resources to hire legal help. Customer facing people at servicers should be trained to guide borrowers or their heirs through the process of paying off the loan, whether by sale or refinance. It is not helpful to have people who don’t understand the borrower or the basic legal issues of each state servicing these loans. The call center servicing models used today create many frustrated and unhappy borrowers and heirs. I know because of the calls I get for help from my HECM borrowers.
I think many of the losses could be mitigated, but it requires a better understanding of the loan, the borrower, and the servicing than the people controlling the industry have. Sitting in an office and looking at studies will not solve the problems with the HECM program. I think the program can be improved for both the borrower and the tax payer, but it will take someone interested in getting into the weeds and addressing the details of the program.
I see a lot of assumptions in your very long comment but little in the way of evidence or projection. So let’s get started.
My only concern is the MMIF issues presented in this comment. If taxpayer dollars must be spent on HECM collateral that is now REO, that is outside of what I believe to be important to the welfare of the HECM program found in 12 USC 1715z-20. As of 9/30/2024, over 900,000 of the 1.3 million endorsed HECMs have terminated. As of that date there were only 287,000 active unassigned HECMs and 138,000 active assigned HECMs. HUD has already projected that after all the costs are paid related to these active loans, there will be a positive $16 billion left over in the portion of the MMIF related to HECMs on a net present value basis. The Independ Actuaries are saying that the amount left over should be closer to a positive $17.4 billion and I believe that because of errors in some of the principles used in their computations, I would push the amount closer to a positive $18 billion.
On the business side, your long comment seems to lack understanding of the current situation at the MMIF. Who are your connections at HUD/FHA? Are they decision makers? If they are, the industry needs help pushing PLFs higher. Have you or any of your friends read through the HUD Annual Report to Congress on the Financial Status of the FHA MMIF for the Fiscal Year Ended September 30, 2024 and more importantly the Annual Actuarial Review of the HECM portion of the FHA MMIF for Fiscal Year 2024? I read both by Sunday night, two days after their release.
If you take out your remarks that relate to the MMIF, all that seems to be left are issues related to Medicaid (state issues, not federal), industry servicers, and HUD’s/FHA’s REO group. The MMIF losses that your comment alludes to are no longer of great concern except to those who are not current on the issues impacting the MMIF and industry servicers in whom I have little interest.
I wish you luck on getting all of the issues not related to the MMIF taken care of. I hope you find those who will take this journey with you.