WASHINGTON — The Federal Housing Administration's recent actuarial report has added more fuel to the fire over concerns about reverse mortgage losses.
A jump in FHA claims for reverse mortgages administered through the Home Equity Conversion Mortgage program drove a 26-basis-point drop in the reserve ratio of the main FHA insurance fund in fiscal 2017, to 2.09%. The decline toward the fund's 2% statutory minimum makes it less likely an Obama-era plan to cut premiums will go forward.
In addition to stoking worries about seniors defaulting on their loans, the spike in losses could also influence the debate over whether the financial reporting for FHA reverse mortgages should be separated from the FHA forward single-family program and placed in a separate FHA fund.
"It is has become an albatross around the neck of the FHA forward program and millions of low-income and minority homebuyers," Brian Chappelle, a mortgage consultant at Potomac Partners in Washington, said of the HECM program. "How much longer are first-time homeowners going to be subsidizing the FHA reverse mortgage program?"
The report is likely to amplify voices clamoring for the FHA to separate reporting for the two programs, which proponents say will better illuminate the financial improvements in the insurance fund.
The Mortgage Bankers Association, the National Association of Realtors and other groups support a review to look at removing the HECM program from the FHA Mutual Mortgage Insurance Fund. At an October congressional hearing, Housing and Urban Development Secretary Ben Carson agreed that separating the two mortgage programs would be a "worthy pursuit."
MBA President and CEO David Stevens said in a press release after publication of the actuarial report earlier this month that removing the HECM program "would strengthen the MMI fund, give a more accurate look at the health of FHA's forward book of business and could allow for the consideration of a mortgage insurance premium reduction."
The report noted that the FHA reverse mortgage program has a negative capital ratio of nearly 20%, while the larger FHA forward program had a standalone capital ratio of over 3.3%. Meanwhile, more FHA homeowners are refinancing out of the agency's insurance program and into conventional mortgages than the agency originally expected.
The FHA paid $5 billion in claims on HECM loans in fiscal year 2017, up from the $4.2 billion in claims paid in fiscal year 2016. In a press briefing on the report, Adolfo Marzol, a senior adviser to Carson, noted that reverse mortgage claims jumped 20% in fiscal year 2017.
"A large percentage of HECMS are adjustable rates and as interest rates rise ... the negative amortization inherent in reverse mortgages increases, and that increases risk to the fund," Marzol said in a Nov. 15 conference call with reporters.
In 2009, HUD merged the HECM and FHA forward programs together in an effort to bolster the forward mortgage program. But that policy move has backfired.
The FHA actuarial report showed that the post-2008 HECM loan portfolio has just $1 billion in capital. And the reverse mortgage program is projected to generate $15.5 billion in loan losses for the FHA Mutual Mortgage Insurance Fund over the next 30 years.
Meanwhile, the forward FHA program has steadily improved over the last six years. It is now projected to generate a profit of $38 billion over 30 years.
But potential HECM losses make it harder for policymakers to reduce premiums on forward mortgages and first-time homebuyers.
"Moving forward, we support an effort to study whether the HECM program should remain in the MMI Fund, or if it should be separated into its own mortgage insurance fund where it can be evaluated on its own. This is a conversation we will be having with policymakers at the agency and on Capitol Hill, and with industry stakeholders," Peter Bell, executive director of the National Reverse Mortgage Lenders Association, said in a Nov. 15 statement.
Bell also noted that HUD implemented several reforms in October to address the performance of the HECM program. As part of the overhaul, HUD revised how loan limits are set and the pricing structure of its mortgage insurance. The changes, announced in August, prompted a temporary spike in demand from borrowers trying to apply for loans before the new policies took effect.
“NRMLA shares Secretary Carson’s optimism that recent policy changes will help sustain the HECM program, which more than a million senior households have used to supplement retirement savings and age in place," Bell said in the statement.
On top of concerns about the effects of reverse mortgages on the FHA fund's health, consumer groups remain worried about how losses in the HECM program affect homeowners. Reverse mortgages have also been a new point of emphasis in False Claims Act investigations, according to industry lawyers, even as Carson has expressed concern about the law's use in mortgage enforcement.
On the same day the FHA released the report, the California Reinvestment Coalition and the Jacksonville (Fla.) Area Legal Aid released a report showing that HECM foreclosures totaled 74,200 from April 2009 to December 2016, including nearly 33,000 HECM loans during the last nine months of 2016. The FHA provided the data to the consumer advocacy groups in response to a Freedom of Information Act request.
"It is an incredible increase in the numbers and it is not clear why that is the case," Kevin Stein, deputy director of the California Reinvestment Coalition, said in an interview.
HUD officials concede that there has been a spike in HECM foreclosures.
However, 99% of the foreclosures are a result of either the death of the last HECM borrower or the borrower moving out of the property, according to HUD. A HECM foreclosure can be triggered when a borrower moves out of the property to an assisted living facility.
HUD contends that only 170 of the 74,200 foreclosures result from failure to pay property taxes and hazard insurance.
Foreclosures on HECM loans are not comparable to forward single-family loan foreclosures because seniors are not obligated to pay principal and interest on their FHA-insured reverse mortgage. However, foreclosures occur when HECM borrowers stop paying their taxes and insurance.
But Stein doubts HUD's assessment of what is causing the foreclosures.
"There has been a huge increase in reverse mortgage foreclosures, and we don't believe it is because people all of a sudden passed away," he said in the interview.
Consumer advocates are concerned the spike in foreclosures stems from servicing problems.
“Seniors are losing their homes at an alarming rate, and HUD appears to be doing little more than rubber-stamping foreclosure requests by servicers who should be making every reasonable effort to preserve senior homeownership whenever possible,” Stein said in a Nov. 15 press release.
Meanwhile, consumer advocates at the Center for NYC Neighborhoods are "seeing a huge jump in reverse mortgage foreclosures," said Caroline Nagy, the group's director for policy and research.
Despite an increase in reverse mortgage lending, Nagy said, most seniors who take out reverse mortgages are in pretty poor financial shape and often have health issues. "There is a lot of confusion around taxes," she said in an interview.
When a senior takes out a reverse mortgage, the lender creates a life expectancy set-aside account that covers property taxes. In cases where the accounts run dry and no one notices, the homeowner gets a statement from the city saying that he is behind on his taxes.
So the borrower is in default and the HECM regulations require a "fairly aggressive foreclosure timeline," Nagy said. "And there are not a lot of opportunities for loss mitigation like a conventional mortgage foreclosure."
"What is really troubling is the amount of money that could save the person's home," she said. "We have been seeing an increasing number of reverse mortgage cases from across New York State for an amount of less than $10,000."
Family members generally have an option to purchase their parent's home that is headed for foreclosure.
“It is a shame to lose a family home for a small amount of money," Stein said.
Consumers groups are also concerned that servicers are not adhering to HUD policies that allow nonborrowing spouses to remain in their home once the HECM borrower dies.
AARP sued HUD in 2014 to protect the right of nonborrowing spouses to remain in their homes. And HUD issued a Mortgagee Letter in 2015 to address the issue. But foreclosure is still at the discretion of the servicer, according to Stein at the California Reinvestment Coalition.
Reps. Maxine Waters, D-Calif., and Denny Heck, D-Wash., introduced a bill to protect nonborrowing spouses from foreclosures. The bill calls for mandatory assignment of HECM loans to HUD if there is an eligible nonborrowing spouse living in the home upon the death of the borrower.
“It is critical that we take every possible step to ensure that seniors who take out reverse mortgages, and particularly their surviving spouses, do not unfairly lose their homes," Heck said in an Oct. 27 press release.
The National Consumer Law Center and the California Reinvestment Coalition support the bill.
“This bill would provide much needed protections for older borrowers with reverse mortgage loans. It would require lenders to give seniors a chance to stay in their homes by repaying back taxes and insurance when they can afford to do so,” said Alys Cohen, staff attorney for the National Consumer Law Center.