Social Security recipients are slated to receive a six percent cost of living adjustment or COLA in 2022, that thanks to a historic spike in inflation. The benefits increase would be the largest in nearly four decades
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The White House budget submitted to Congress in June signaled a strong performance of the Home Equity Conversion Mortgage program. HUD’s summary of loan levels predicted the HECM portion of FHA’s portfolio was expected to generate a negative credit subsidy of -2.54% in Fiscal year 2022. Translated that means it’s expected that incoming receipts will exceed claims paid that year. According to a June report in Reverse Mortgage Daily fiscal year 2021 which we just concluded is also expected to generate a negative subsidy of -2.39%.
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While these short-term improvements in the HECM’s cash flow are a positive sign, the value of the HECM portion of FHA’s MMI fund is the source of continued concern. Case in point, the wild fluctuation of the HECM program’s standalone capital ratios. While the capital ratio of traditional FHA loans climbed steadily in the years 2016-2020, the HECM portion varied widely each fiscal year from a negative ratio of 11.81% in 2016, 18.3% in 2017, 18.83 in 2019, 9.22% in 2019, and .78% in 2020. Those numbers are highly sensitive to home price values and interest rates- both of which the housing agencies have no control. That means should home values slip the program’s valuation could easily go back into the red quickly.
One thing HUD and FHA are striving to control the costs of is HECM servicing- the chief reason the Biden administration boosted FHA’s administrative contract budget by $50 million for the fiscal year 2022. In its budget review, HUD states, “The primary cause of the increase is the growing expense of servicing the Secretary-held HECM portfolio.” A portfolio the agency says is growing while being challenged with Covid-19 and natural disaster claims.
The servicing of HECM loans has long been an area of concern and dispute among industry participants. One of the challenges is that HECMs are not assigned to FHA’s service contractor until the loan balance reaches 98%. Another sticking point is the question of how efficiently FHA’s HECM loan servicer is dealing with property vacancies and the sale of homes to recoup expenses.
In July 2018 then FHA Commissioner Brian Montgomery in a media call pointed to a potential source of HECM losses. “We are digging deep in the portfolio to find out of the problem is on the front end or the back end. 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”, said Montgomery. Adding, “looking at the back end of the process, once the loans are assigned to HUD is the area we are focused on. I am not sure further [principal limit] cuts are going to fix that problem.”
Proposals to fix the ‘back-end problems’ ranged from contracting with a new servicer, expanding the Cash for Keys program to the HECM for exiting homeowners, and allowing existing servicers of HECMs not in assignment to continue servicing the loan after the loan balance reaches 98% of the original maximum claim amount.
While such reforms have not come to fruition, some anticipated a change of the loan servicer for HECM loans in assignment as FHA sought new contracts in late 2020. On October 5th HUD’s decision was announced. “NOVAD Management Consulting (NOVAD) will remain responsible for servicing Assigned Secretary-Held Home Equity Conversion Mortgages (HECM) and HECM Subordinate Mortgages,” said HUD in a statement. Novad has served as FHA’s HECM servicer since 2014. While some argued for a new servicer to address increasing expenses, others like the former HUD Deputy Secretary of HUD Brian Montgomery argued keeping the existing servicer may ultimately reduce costs for the program.
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This week we interviewed Chief Appraiser John Dingeman with Class Valuation asking what’s truly slowing down appraisal turnaround times…
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Is all debt bad or are there times when debt can work to your advantage? Also, the pressures today’s retirees face.
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Join us for the final installment of our interview with Harlan Accola who penned a column in NASDQ fact-checking Dave Ramsey’s erroneous reverse mortgage claims.
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What if the advice financial commentators give about reverse mortgages is simply wrong, misleading, or even worse leaves the audience in a worse standing?
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The appeal and eligibility of reverse mortgages for older homeowners are largely driven by home values and interest rates. And there are signs that the housing market may be beginning to falter. First new home sales rose in June and July but that’s only the second increase in the last six months. Second, new home sales have steadily fallen since March with only a modest increase in July. Third, housing inventory began steadily increasing this spring, a trend that’s expected to continue now that the eviction bans have ended. Keep in mind evictions and sales of rental properties will lag several months as landlords step through the arduous eviction process so don’t expect an immediate surge for several months.
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What we are witnessing is an artificially inflated housing market spurred by slashing interest rates and government stimulus. The question is how long can this continue? After all, today’s low interest rates that have skyrocketed a homebuyer’s purchasing power are unlikely to go lower. So what happens when banks can foreclose, landlords can sell rentals, and banks increasingly tighten credit and strengthen their cash positions. Truth be told, this ‘irrational exuberance’ to quote Alan Greenspan will be paid for. So are we in a housing bubble or simply a boom in prices? Core Logic’s Chief Economist Frank Nothaft expects a boom rather than a bubble. Nothaft says I don’t expect we’re going to see a housing price crash. I don’t think we’re in a bubble.”
What would sustain today’s record home values? Continued constraints in housing supply, and continued low interest rates. What could trigger a housing bubble? CNBC real estate correspondent Diana Olick says “you need a catastrophic economic event to make a housing bubble pop. You can definitely have a pullback in the heat in the housing market. But to really have that market crash there needs to be that event”. In 2008 that catastrophic event was the failure of investment banks and investment losses from subprime-related investments to name a few.
So barring any sudden economic crisis or a sudden several of the Federal Reserve’s interest rate and inflation strategy we’re more likely to see the housing market cool down. And truth be told that would be the ideal outcome with far less damaging consequences for homeowners and the U.S. economy.
Certainly, evictions and foreclosures will increase overall inventory but not enough to offset a decade of lackluster new home construction. This is good news for reverse mortgage professionals and their future borrowers. Elevated home values and low rates will provide increased borrowing power allowing many homeowners to retire their existing mortgage and perhaps secure a line of credit for these most uncertain times.
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Despite being a government-sponsored and supervised loan reverse mortgages are rarely mentioned by housing agencies when discussing senior housing insecurity, foreclosure risks, and quality of life. It’s the reverse mortgage paradox.
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As of July 2021, 682,400 homeowners 65 and older were behind on their mortgage payments.
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It’s not boom or doom when it comes to the housing market. While Americans are getting priced out of the housing market millions of savvy older homeowners are sitting on a goldmine. Not just a motherlode of equity but a potential source of cash flow that could be mined to help temper the impacts of inflation and as a hedge against financial shocks.
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