Despite improved HECM outlook, the CBO recommends four major changes to the reverse mortgage program
In August 2016 AARP recommended the elimination of the HECM ‘line of credit’
While FHA recent reports show a positive financial outlook for the fiscal year 2020, the CBO issued a report today proposing 4 major potential reforms to the HECM to reduce long term risks to the taxpayers. The Congressional Budget Office provides budget and economic data to Congress or the legislative branch which sets their priorities. In essence, they are the watchdog for the nation’s purse.
1-Make FHA a direct lender. Under this proposal, lenders would do the leg work or marketing and originating the loan, while FHA would make the disbursements directly to the homeowner. In addition, the government would service the loans. The CBO acknowledges significant drawbacks in scaling to manage a large number of loans…
In two emails this weekend about the Report, I ignored the body of the Report and instead looked at the politics and questioned the reliability of one of the crucial assumptions in the Report. Of the two, the politics is at least as important as its content.
As to the politics, let us look at who requested the Report. The answer is it was requested during the 115th Congress and currently we are in the 116th Congress. In the 115th Congress, the Chairman of the House Financial Services Committee (which is the House Committee that oversees HUD) requested the report as noted in the last page of the Report. The Chairman at that time was Representative Jeb Hensarling, a Republican. The current Chairwoman of that House Committee is Representative Maxine Waters, a Democrat. Watching the fights during 2017 and 2018 between Mr. Hensarling (no longer a Congressman) and Mrs. Waters (who throughout the 115th Congress was the ranking member of that Committee) made it apparent that these two Committee members agreed on little. It seems the current majority party (Democrats) on the Committee are less interested in legislating such drastic changes to the HECM program than were the Republicans who were the majority party in the last Congress and looking for Federal Budget reductions.
On the other hand, the Senate Committee on Banking, Housing, and Urban Affairs (which is the Senate Committee that has oversight of HUD) may have a different view of the CBO Report. Until January 2019, the Republicans had been the majority on the Committee since the 114th Congress and Republican Senator Mike Crapo has been its Chairman since late January 2015. With the President demanding HUD to come up with a plan to make the HECM program self-sustaining, Chairman Crapo may use the Report to evaluate the plan that HUD presents to the President.
So despite the change in the control of the House and its committees since January 2019, our industry should still be very concerned about the Report but NOT necessarily to the degree we would need to be if the Republicans still controlled the House. That should give some help in evaluating the political urgency of the situation in May 2019 but there still exists the need to monitor the situation to be sure that the Report is NOT being used to create legislation to change the HECM program.
As an important side request, I appeal to 1) Dr. Chris Mayer at Longbridge Financial and 2) Dr. Edward Seiler of Dworbell, inc. (and serving in the management at NRMLA) to provide copies of the comments they provided CBO on the Report to either I) the industry news services such as HousingWire, Reverse Focus, and/or Reverse Mortgage Daily or II) NRMLA for publication in its Reverse Mortgage Magazine. I also appeal to Laurie Goodman at the Urban Institute to do the same.
Finally, as previously demonstrated, the size of the volume of HECM endorsements has a positive correlation to the size of the loss that each new fiscal year’s book of business (endorsed HECMs) will result in. There are exceptions such as fiscal 2014, 2015, and 2016 but that was due first to the positive impact of the changes HUD required to be implemented on September 30, 2013 and then also the transition on the horrifically negative impact that financial assessment has had on the losses created on HECMs where the related borrowers were subjected to financial assessment.
So how do endorsements play into the Report? In performing their analysis the CBO assumed that the endorsements for fiscal 2020 will be 39,000. They stated this was simply an 8% increase over the endorsements for fiscal 2019. That implies CBO used 36,100 endorsements as the endorsement total for fiscal 2019. But no one knows what that total will be. Right now using 1) the 18,519 endorsement total through the seven months ended April 30, 2019 of fiscal 2019, 2) the case number assignments for the four months ended April 30, 2019 of 16,539 (based on the four month lag rule of thumb), 3) an estimate of 4,600 case number assignments for May 2019, and 4) a conversion rate of 67.6% (high side), total endorsements for fiscal 2019 should be much closer to 32,800 than 36,100. In other words, the CBO is over estimating endorsements for fiscal 2019 by 9,9%. Further the actual rate of increase to get from 32,800 to 39,000 endorsements for fiscal 2020 is 18.9%. Does anyone believe that endorsements will increase by almost 19% in fiscal 2020?
Now we must look at an 8% growth in endorsements for fiscal 2020. Who says there will be any growth? Look at fiscal 2018 with its 48,359 endorsements. If the endorsements for fiscal 2019 are approximately 32,800, the industry will have suffered a 32.2% loss in endorsements. Fiscal 2018 saw a 12.6% reduction from the 55,322 endorsements of fiscal 2017. It will be at least 4 plus months before we can begin to discuss the endorsement picture for fiscal 2020 with any sense of certainty and reasonableness. After seeing endorsements drop from a total of 55,322 for fiscal year 2017 to a fiscal year of an expected 32,800 for fiscal 2019 it is clear that the industry saw a percentage loss of 40.7% in endorsements for the two consecutive fiscal years, which is the largest percentage endorsement loss for any two consecutive fiscal years in the history of the industry. These percentage losses are startling. No wonder Live Well and First Federal have left the industry without selling their underlying turnkey HECM origination businesses..
32.2% will be the highest percentage loss in endorsements when comparing the endorsements of one fiscal year to the endorsements for the next fiscal year, the HECM industry has ever suffered. Then there is at least ONE simple math error by the CBO. In comparing the loss percentage of HECMs endorsed in fiscal 2018 to the 36,100 they use for the projected endorsements for fiscal 2019, they say it is only 20% when in fact it is 25.4%.
So not only has the political landscape changed since the CBO Report was first requested to the political situation in May 27, 2019 but one of the most crucial assumptions as to the expected endorsements for fiscal 2019 is overstated. Further with no reasoning given, somehow the CBO expects endorsements to grow by 8%. While 8% may be the exact rate of growth, it is HIGHLY unlikely 39,000 HECMs will be endorsed during fiscal 2020. Further, the CBO seems to have at least a little trouble with simple math.
So it does not seem the foundation upon which the CBO bases its Report is all that sound. If that is the case, then one must at least skeptically if not pessimistically review the options that the CBO suggests. Yet superficially relying on the reputation of the CBO, most readers of the Report will not analyze it nor go any deeper than its conclusions, resulting in the Report being generally accepted on its face.
Thank you for your thorough analysis. I greatly appreciate it.
Glad to help Tina. More in-depth analysis coming this Monday.
Good job James (sorry t be so formal). I could not open the article for several days, but now have the opportunity.
Let’s talk soon. I will be looking for your number this afternoon, Jim; I will be with Martin.
Thank you Shannon for bringing to everyone’s attention.