Insurance fund for RMs looking healthy: Industry Leader Update

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HUD Secretary says fund backing reverse mortgages looks good…

The lackluster condition of of the Mutual Mortgage Insurance fund in fiscal year 2010 lead to some sweeping changes which included a reduction of principal limit factors, an increase of ongoing FHA insurance and the introduction of the Saver.

What changes can we anticipate when the insurance fund’s actuarial report is released this November if any? The housing market aside there are factors that have improved the overall financial health of this fund which backs federally-insured reverse mortgages.

6 comments

James E. Veale, CPA, MBT October 17, 2011 at 11:41 am

It is interesting to note that HUD may be required in the next few fiscal years to request a subsidy for the GI Fund due in part (but only in part) to the poor performance of HECMs endorsed before October 1, 2008. Nothing has changed for the better which would make the negative outlook go away.

As to the HECM portion of the MMI Fund which only includes HECMs endorsed after September 30, 2008, HUD took a remarkably extraordinary step during the fiscal year September 30, 2010 to shore up the expected loss which the cohort of HECMs endorsed during the prior fiscal year was projected to generate. It took over $1.7 billion from the net position (“accumulated reserves” or “retained earnings”) of other programs in the MMI Fund and placed them in the HECM portion of the MMI Fund. This is the first known transfer into or out of any portion of the HECM net position in any of the funds within HUD.

Then in late summer 2009, Congress made it clear it would not subsidize the HECM program so HUD, in its wisdom, reduced the Principal Limit Factors (“PLFs”) so that the program could continue even if it meant less principal limits for new borrowers. As the next fiscal year rolled around two things were noted, the outlook for HECMs to be endorsed during fiscal year 2011 would not be stronger than the projection for the endorsements for the current fiscal year (ended 9/30/2010) and based on the actuarial report from the prior November even the HECM portion of the MMI Fund needed to be strengthened so HUD made two important changes as Shannon correctly pointed out. HUD increased the ongoing MIP annual rate by 150% and also added the Saver.

HUD also took an important step to readjust the PLFs so that they more correctly reflect current risks. First it lowered the floor for the highest PLFs from the 5.5% expected interest rate to 5% and increased the related PLFs for younger borrowers at the floor. It also decreased PLFs for older borrowers across the board. Beginning at the expected interest rate of 5.5%, all borrowers have lower PLFs. This change in PLFs was met with general celebration by the HECM community with the promise from HUD that as the housing economy changes for the better, HUD will reevaluate the PLFs to see if higher PLFs can once again be made available in the future.

As to Savers, because of their low volume, they will not contribute as much to the soundness of the HECM portion of the MMI Fund as hoped. It has been encouraging to watch their growth in the endorsements numbers but it will be at least another fiscal year before we see its percentages reaching the original projection of 20%. The principal reason for the expected delay is the loss of Wells Fargo as the leader in the origination of this product.

Once the Saver catches on, however, as Mr. John Lunde, once predicted, there is no reason why it should not be at least 50% of all endorsements. That realization should be seen sometime near the end of this decade.

Reply
Shannon Hicks October 17, 2011 at 11:53 am

Jim,

Great comments that give us some insight into the inner working of the fund, future challenges and the rationale employed to keep the program solvent. Much appreciated.

Reply
James E. Veale, CPA, MBT October 17, 2011 at 12:01 pm

Shannon,

Thank you.

As usual your report did a great job of focusing our attention to a vital part of the HECM program. Keep up the good work!!!

We are all looking for brighter days when my next comment will not be just a dream but the environment we all work in.

I should also add, the increased Saver production could mean the higher lending limit can be justified for years to come. While I know many who want to see proprietary products return will not be happy about that statement, affected borrowers should be.

Reply
James E. Veale, CPA, MBT October 17, 2011 at 11:54 am

One quick point should be added about the benefits of Savers. As the rate of home appreciation begins to return to the norm, we hope to see Savers become a much larger percentage of endorsements than now. If that is true, we expect to see PLFs return to previously higher levels, ongoing MIP drop by as much as 40% to 60%, and perhaps a lowering of upfront MIP on Standards of 25% or more. (The last item is more wish than reasonable hope for now.)

So go out there and generate more Savers.

Reply
Tyler October 18, 2011 at 8:03 am

Although I make an effort to provide information regarding the saver program, I have yet to have a client choose that plan. I’m not complaining but am curious what others are doing to see closings in that option.

Reply
James E. Veale, CPA, MBT October 18, 2011 at 9:33 am

Tyler,

Our traditional senior segment rarely needs or can successfully employ a Saver. So do not be worried, you are simply not targeting the right segment or their advisors.

If you notice more reverse mortgage ads are appearing on media normally viewed by more affluent seniors. MetLife and others are specifically targeting this segment. While some Saver volume is coming as a result of it being an alternative product, it is principally coming from business which would not otherwise exist except for this product (i.e., incremental business).

Most lenders simply cannot compete with the costs MetLife provides Savers through its retail unit.

Reply

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