Reforms may hinge on Actuarial Report

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Despite improvements, Secretary Carson pushes for 3 key changes

While we’ve seen no official mortgagee letter or Congressional action on recently-proposed reforms to the Home Equity Conversion Mortgage- some key changes were restated last week in HUD Secretary Ben Carson’s written remarks to the House Financial Services Committee. Legislative proposals such as the elimination of a national lending limit and the removal of the HECM from FHA’s Mutual Mortgage Insurance Fund may hinge on next month’s Actuarial report to Congress. The report details the financial health of the program. However, the potential elimination of HECM-to-HECM refinances could be enacted outside of Congress by the FHA as an administrative change that doesn’t require Congressional approval. While opposed by key industry stakeholders, such a change could be held forth to lawmakers as confirmation of the agency’s continued commitment to the stewardship of the program should next month’s report reveal increasing financial liabilities.

The water is not quite under the bridge

Truth be told, recent fiscal year insurance claims provide little if any insight as to how effective previous policy changes may have been. Think of the reverse mortgage program’s financial liabilities as a large river. Notable incidents upstream will not be felt

3 comments

James E. Veale, CPA, MBT October 29, 2019 at 1:18 am

The headline is fairly accurate especially when it comes to the elimination of HECM refis since that is the only action that Secretary Carson can take on his own. As to the rest of the article, it reflects conventional wisdom which has little knowledge of the real situation of HECMs in the MMIF.

HUD projected that as of 9/30/2018 just for the 55,292 HECMs endorsed during fiscal 2017, the negative net present value of the future cash flow from that one cohort of HECMs will be in excess of $1.8 billion. That is an average loss for every HECM endorsed in that fiscal year of about $32,750.

HUD also projected that as of 9/30/2018 just for the 48,359 HECMs endorsed during fiscal 2018, the negative net present value for the future cash flow from that one cohort of HECMs will be in excess of $1.5 billion for an average loss per HECM endorsed during fiscal 2018 of $31,990.

As of 9/30/2018, HUD projected the negative net present value for the future cash flow for the HECMs endorsed in each fiscal year since 10/1/2008 and the average loss per HECM was not the worst in prior fiscal years but in fiscal years 2017 and 2018. The average loss per HECM endorsed starting on October 1, 2008 and ending on September 30, 2018 was $24,375 (with total endorsements of 644,090).

For years, the myth has been that the MMIF was negative because of losses in the early years of HECMs being introduced into the MMIF. Yet I would strongly argue that $3.4 billion out of the $15.8 billion of the losses were incurred during fiscal years 2017 and 2018, when HECM endorsements were at their lowest in more than a decade. By 9/30/2018, a full ten years of endorsements were reflected in the MMIF. Fiscal years 2017 and 2018 had 21.5% of the total negative net present value from past, present, and future cash flows of $15.7 billion for that decade.

So you tell me are HECM losses retreating or growing despite lower endorsements? Don’t be cheated or fooled by anecdotes. Read the independent actuaries’ annual review on the HECMs in the MMIF when it comes out in the next three weeks. It will be an eye opener and then compare it to the same review for fiscal 2018 but be sitting down when you do.

Reply
Victor October 31, 2019 at 3:41 pm

The FHA Reverse Mortgage Program is coming to an end. The cost of the program is the reason that HUD will put an end to the Home Equity Conversion Mortgage. The baton will be picked up by private industry and the results will be that the product will only be offered in certain states, like California, Colorado, Washington, etc… The southern states will probably be left out, with the exception of Texas, Maryland, Virginia and maybe Florida. This will be driven by the growth of these real estate markets, and nothing else. The HECM program as a federal offering is in trouble, because home values don’t keep up with costs of this program.

Reply
James E. Veale, CPA, MBT October 31, 2019 at 6:21 pm

Victor,

Your perspective is interesting even though it is founded in pessimism.

It is very doubtful that the HECM program will be lost but it is also very doubtful if HUD will take the action needed to substantially mitigate the loss per endorsed HECM we have seen for fiscal years 2017 or 2018. Will time run out? Probably not; however, it is quite likely HUD will try to take the easy way out. If the HECM is ever to come close to being self-sufficient as the less than knowledgeable once claimed HUD must restructure the HECM by using geocentric Principal Limit Factors (PLFs).

HUD would like to believe that it designed mortgage insurance that was a strong product without dealing with the low appreciation rates in specific areas of the country. That has failed and failed miserably. If 16% of the endorsements in the MMIF represents 21.5% of the losses and those endorsements happened in fiscal years 2017 and 2018, is the situation getting better or worse? If HUD takes the easy way out, expect condemnation from House Republicans. As of today, if the Republicans take back 20 seats out of 435 total seats in the House up for re-election just over one year from now, they will take back control of the House. In that case, the road forward could get even more difficult than it is right now.

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