As HECM losses continue serious questions require answers
There’s no question that it’s been a tumultuous period for the Home Equity Conversion Mortgage industry. Lenders, brokers, and originators alike have been left scratching their heads trying to ascertain not only the rationale behind recent changes but more importantly why previous lending ratio reductions and the financial assessment have not stemmed the tide of mounting losses.
After the enactment of the Financial Assessment and proposed final rules, some felt that perhaps our industry would enjoy a respite from another major overhaul. However more substantial changes were being quietly shaped inside the hallways of HUD as the agency was grappling with the early numbers and mounting losses ultimate reported in the actuarial report released last month…
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While it is clear that losses in the MMI Fund will be calmed down by lower PLFs and increasing upfront MIP over ongoing MIP, it is not clear what will calm losses down before the end of the next decade. Shannon is right we need to diagnose what is REALLY causing the losses and what can be done to calm things down. Even NRMLA which should be NOT lost on this matter seems the second most lost on this matter player, following FHA.
Financial assessment was supposed to do a whole lot in putting out the burning rage, yet the NPV for future cash flows from the fiscal 2017 book of business as determined HUD shows a shocking negative $2 billion value. It is doubtful if a single HECM endorsed last fiscal year did not go through financial assessment.
The negative NPV per HECM for the active HECMs endorsed during fiscal year 2016 in the MMI Fund as of 9/30/207 is 30% than negative those endorsed in fiscal 2015 and still active in the MMI Fund as of 9/30/2017. Yet there are more active HECMs from the 2015 endorsement vintage than the 2016 endorsement vintage still active in the MMI Fund as of 9/30/2017. All but a small percentage of HECMs endorsed in fiscal 2016 went through financial assessment while very few of the HECMs endorsed in fiscal 2015 did. So why is the loss more pronounced in fiscal year 2016 active HECMs than fiscal year 2015 active HECMs?
Using the logic of one vendor which has over and over again declared that financial assessment is getting better and better needs to modify that claim by saying that financial assessment is getting better and better at creating more and more losses in the MMI Fund!!
As a 71 year old originator with my onw Reverse Mortgage, the perspective changes. I’ve closed more than 1,000 loans, forward and reverse, purchase and refinance, conventional, FHA, and VA. From what I see, the losses on Reverse Mortgages are being addressed with the same tools one would use with a forward mortgage. Reverse Mortgages, and Reverse Mortgage borrowers are different. Until the people writing the rules take the time to understand the differences, they will continue to have complaints and suffer losses. The important needed changes are at application and servicing, not underwriting. Some problems become obvious because we follow loans from beginning to end. We know and follow our borrowers. The people writing the rules are making assumptions that simply are not true.
Don,
Your traditional reverse mortgage analysis is so vague as to be of little help at all. Where we agree is that what goes wrong with HECMs rarely happens with mortgages which are NOT reverse mortgages so applying forward mortgage cures to reverse mortgage woes is fruitless.
The perceptions of reverse mortgage originators are generally myopic due to the small area they deal in. While you personally bring anecdotes to bear, they are of little value when determining what is going on with the collateral and mortgages in the industry as a whole.
As to your personal success, I wish you the best.
There is no doubt we must stop the bleeding.
I do have a question though:
Is it possible that the continued losses in the MIP Fund are still being caused by the loans we closed prior to FA being established?
FA is just a little over 2 years old. Keeping in mind no lender would have closed a reverse mortgage if the client wasn’t current on their taxes I find it hard to believe there could have been enough defaults “post FA” to cause the MI Fund to continue to suffer losses.
The defaults we are suffering from in 2016 & 2017 have to be from loans written several years ago. (New loans just can’t default that quickly…
Just an observation…
Mr. Banner,
What do you mean by the MIP Fund; FHA has no such Fund which accounts for HECMs. I will assume you mean the Mutual Mortgage Insurance (or MMI) Fund rather than the G&SRI Fund (General and Special Risk Insurance Fund).
Mitigation of losses in the MMI Fund was never the primary or even secondary motivation for Financial Assessment. No form of financial assessment can prevent defaults for payment of property charges when life events occur and create a vacuum as to senior financial resources.
What financial assessment was intended to mitigate were foreclosures from property charge payment defaults in early years (except the first year) of the life the HECM where lenders were being forced to accept as borrowers those who had all the signs of having a propensity to default due to existing financial difficulties and by this reduction also decrease lender reputation risk from throwing out grandpa and grandma when the lender knew from the start that the only issue about property charge defaults were not if they would happen but rather when they would happen.
Yet turn to Table 5 on Page 13 of the fiscal year 2017 Actuarial Review of the HECMs in the MMI Fund and you will observe the NPV of future cash flows from each cohort of HECM by year of endorsement as of the end of fiscal 2017. On Table B-22 on Page 103 of the fiscal year FHA Annual Report to Congress you will find the active HECMs being accounted for by the MMI Fund presented by year of endorsement, showing that there are over 412,000 active HECMs in total being accounted for by the MMI Fund.
The average expected NPV loss per HECM endorsed in fiscal 2017 is almost $36,000 as of 9/30/2017 as determined by FHA. The total negative NPV of a negative $1.961 billion per FHA for 54,600 HECMs endorsed during fiscal 2017 but still active on 9/30/2017. Very, very few if any of those endorsements were of HECMs that did not go through financial assessment.
Yet when we look at fiscal 2015 when none but a very, very few HECMs underwent financial assessment, we find that there are 47,500 HECMs still active as of 9/30/2017 with a total negative NPV of $1.05 billion. That is an average of a negative $22,000 NPV per HECM.
The result is the that loss per HECM when there was financial assessment applied was 63.6% larger than those which had no Financial Assessment applied.
I will leave it to readers to look at fiscal years 2014 and 2016 data to see how losses from financial assessment years are on average larger than those with HECMs that did not undergo financial assessment. This alone brings into question if financial assessment does not act as some kind of catalyst to increase losses in the MMI Fund.
It was great talking with you today. Please call with any questions.
Enjoy the Holidays and your time with your family.
HUD needs to turn around and look at their back end. The mounds of red tap that regulate the foreclosure process is the main problem. There is nothing business like about a government foreclosure. Cost is not the object or even a consideration. And some states make this process ridiculous. HUD need to streamline the process and get the home back on the market and stop wasting the MMI funds. Realtors tell me all the time housing inventory is very low. HUD need to think this through and satisfy housing market demand.
Scott,
Foreclosure on residential loans is generally completed outside of federal law. Unless a loan is in assignment, HUD has no part in a foreclosure.
Lenders foreclose generally through their servicers who use specialists. HUD has been trying to bring down these costs but basically they have no legal position in the process unless they own the first mortgage position.
Foreclosure in many states is done entirely outside of the courts. These states are generally known as trust deed states.
But foreclosure covers less than 50% of how loans terminate. They also terminate through 1). deed in lieu of foreclosure, 2). short sale, and 3). full payoff of the loan either through direct payment by the homeowner or through refinance.
If a HECM is a nonrecourse mortgage, which it is, then the foreclosure process is generally outside the control of HUD. Please correct any misunderstanding I have created.