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A Second Look at MMI Fund after Program Changes…
BREAKING:Read Mortgagee Letters 2013-27 & 2013-28 for complete details of changes.
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A second look at the Mutual Mortgage Insurance Fund is exactly what FHA plans do to after setting the wheels in motion for historic changes to the reverse mortgage. Yes, after committing to eliminating both the Standard and Saver product in lieu of a new one FHA wants another look. It all began in November 2012 when an Actuarial review of the MMI fund found that the reverse mortgage portion accounted for a negative 2.8 billion dollar economic value. Economic value is a better description than losses for these are projected losses based on actuarial analysis and data. In other words, with home values that fell this percent and projected loan balances and appreciation the fund would pay X dollars. Early figures showed the HECM portion of the fund accounted for 2.8 billion in projected losses of the 16 billion dollar overall future shortfall. Later that figure was revised to show projected losses from reverse mortgages totaling $5.2 billion. The dire numbers were too unsettling to ignore. So why the second look at the fund at this stage?
5 Comments
When FHA starts making long-term policy based on short-time “exceptions”, our over 62 year old crowd is going to lose for sure.
Using the 5 year “window” of 2007 to 2012 would show a big down turn in prices– and BIG claims for sure against FHA’s insurance fund.
But would those losses continue in the next 5 years? I think not.
Most home values have comeback to be equal or better than they were just two years ago. Face it, this was a one-time recession in home prices.
So why base your new mortgage insurance cost to consumers on this 5 or 6 years? Why not use the past 30 years?
Mr. Lamas,
You need to look at the actual MMI Fund. There are few, if any, homes serving as collateral for a HECM in that fund which were appraised before mid 2008. Even then the overwhelming number of HECMs in that fund have collateral appraised after September 30, 2008. The only HECMs accounted in that fund are those which were endorsed after September 30, 2008; all others are still accounted for in the General Insurance Fund.
This is not about loss in home values so much as in the tepid growth in home values in those areas where HECMs are most concentrated. Yes, there will always be incorrect assumptions in estimating losses and income in funds of this nature but that is why actuarial reports of this nature are done annually as facts and circumstances closer to termination become more apparent.
Some of us who have been around lending for quite some time still don’t understand where these “numbers” are coming from. The melding of MMI and HECM and the general questioning of anything coming out of Washington these days begs to have a clear explanation of the actuarial analysis (i.e. – here is the realistic risk exposure above the estimated value of assets less costs of dissolution vs. here’s the projected premium income from those loans. We’ve had movement but it appears as one of those “intentionally challenging to understand” reports to keep folks from really understanding what is going on. Then when this new analysis is done, possibly there will be further explanation and then confirmation of what changes are done to be justified. FHA still seems to be too quick to seek indemnification with unclear rules and too sensitive to throw the obvious crooks in jail.
The $5.2 billion is not a second stab at the same MMI Fund as of 9/30/2012 but rather it is that plus the projected book of endorsements for fiscal 2013. Since HUD calculated the $5.2 billion estimate, this means that the problem is growing. A growing negative position during fiscal 2013 signifies that the problem is not just an appreciation issue alone, although another enormous appreciation balloon might shallow up the problem at least for awhile.
Yet the real situation is that the HECM portion of the MMI Fund was not just $2.8 billion negative but in fact $5 billion negative as of 9/30/2012. The reason why the negative amount is understated is that HUD stripped over $2.2 billion from other programs in the MMI Fund during fiscal 2010 and 2011, just to cover HECM losses. The information is clearly labelled and identified in both the financial statements presented in the actuaries’ and auditors’ reports for the HECM portion of the MMI Fund for fiscal 2010 and 2011. The transfer of funds by HUD was an attempt at applying window dressing to the HECM situation, so that the real situation would have a chance of being ignored until appreciation could more thoroughly deal with the situation. As the saying goes: “Housing appreciation covers a multitude of financial problems.”
So what HUD was really saying is that it estimates a negative position for the HECM portion of the MMI Fund to be (without the over $2.2 transferred into the HECM portion of that fund) as of the end of this month about $7.5 billion. With the HECM insurance in force as of the end of this month expected to be over $120 billion, an additional $2.5 billion could be required for capital reserves meaning that by the end of this month, the HECM portion of the MMI Fund could most likely be out of compliance with its capital reserve requirement by about $10 billion.
The real problem is not what losses have been realized or how the estimates may be wrong but rather what does the law require. So does the second opinion really matter? Why not three or fourteen more? Will the other reports prove anything more than by playing with the assumptions different answers result? Other than justifying desired policy changes, other reports seem little more than a waste of money.
What is needed is a cap of amounts available to seniors in the first year following initial funding plus financial assessment along with a hybrid product that allows borrowers to elect a fixed rate feature but only up to the amount of funds actually drawn out at funding. The remainder of the hybrid would be a HECM ARM. With its new powers, the hurdles hindering hybrids seem much lower.
So even if reports come out with a $5 billion negative net position, $2 billion, or $15 billion, the problem is all the same. The HECM program has not been self-sustaining since at least fiscal 2009.
(The opinions expressed are not necessarily those of RMS or its affiliates.)
A disproportionate conclusion may well be drawn by a simplistic approach to evaluating total fund losses. A far more accurate picture and evaluation could be better derived by “batching” loans chronologically in, for example, four or five year intervals.
The six year zero or negative growth factor we experienced after the home value bubble burst would absolutely overwhelm the prior years’ statistical expectations for value-growth results. The community would be far better served if the new calculation would isolate HECM expectations by working backwards in 4 year loan batches. In that way, a statistician may better forecast potential results amidst updated changed parameters.
In other words, results compiled from the most recent historical four years data, including lower initial home values, settled principal loan values and higher insurance costs, could be the best baseline and offer far more accurate result on which to compare current expectations to prior expectations and project future fund effects. Drawing generalized results via an all-inclusive survey would hardly give management the necessary tools for making sound financial decisions as to the solvency expectations and “future accretive value” to the fund that adding additional business at present day values and rates might provide to it. jf