Troubled FHA Reverse Mortgage Program May Prevent More Premium Cuts
WASHINGTON – A second consecutive positive report card for the Federal Housing Administration's mortgage fund is generating more pressure for the agency to make another premium cut, but also sparking concerns about its reverse mortgage program.
The Home Equity Conversion Mortgage program experienced a huge swing in its net worth during the fiscal 2016 year, plummeting from a value of $6.8 billion in fiscal 2015 to negative $7.7 billion.
"It is certainly time to have a policy discussion around moving the HECM program from the Mutual Mortgage Insurance Fund back into the General Insurance/Special Risk Insurance Fund," said Brian Montgomery, vice chairman of The Collingwood Group, "The amount of volatility is evident by the wide swings in the economic value of the HECM books of business over the last three years."
The huge swing in net worth is the result of new models developed by the independent auditors that produce the actuarial report each year.
"Two changes essentially resulted in lower recoveries at time of sale for FHA, negatively impacting the estimated net worth of the HECM program by $8.8 billion," according to a Department of Housing and Urban Development summary of the actuarial report. And a third modeling change erased $4.4 billion in value.
"The HECM book of business was essentially unchanged in economic net worth after you subtract out the modeling changes," said Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute.
But overall, the reverse mortgage program is clearly weighing down the Mutual Mortgage Insurance Fund. The forward single-family program has reported steadily rising net worth for the past five years, doubling its value to $35.3 billion in fiscal 2016.
Industry representatives have already begun lobbying HUD to separate out the reverse mortgage program.
"An important subtext to this report is the continued volatility in the HECM book of business, which this year turned negative, dragging down the overall value of the Mutual Mortgage Insurance Fund," said David Stevens, the president and chief executive officer of the Mortgage Bankers Association. "Given the importance of FHA to low- and moderate-income and first-time homebuyers, the next administration may want to look at accounting for the two programs individually in order to isolate the critically important forward book from the wild swings of the HECM fund."
On its own, the single-family program achieved a 3.28% ratio of reserves to guaranteed mortgages, nearly double its ratio from a year earlier. In contrast, the reverse mortgage program's fund reported a negative 6.9% ratio. The result was that HECM dragged down the overall MMI ratio to 2.32%, even though the single-family program is ten times larger.
"It is frustrating that it has such a negative impact on the forward program," said Brian Chappelle, a consultant and co-founder of Potomac Partners.
Back in 2013, FHA borrowed $1.7 billion from the U.S. Treasury to recapitalize the HECM program. And despite the many changes FHA has made over the past five years to the reverse mortgage program, its financial results continue to be volatile.
But the "FHA [forward] single family program has weathered the worst recession since the Great Depression at no expense to the American taxpayer," Chappelle said.
Some note that it's difficult to know the truth health of the reverse mortgage fund because of the modeling changes made by the independent auditors.
The auditors found that value of the [HECM] collateral was lower than the single-family collateral and "they projected that out 40 years," according to Ed Golding, a principal deputy assistant to the HUD secretary who runs the FHA program.
"And all the data is backward looking. They are taking data from defaults on books of business before we made important changes to the [HECM] program," Golding told reporters during a briefing.
FHA has implemented numerous changes to the HECM program over the past few years to reduce losses and improve performance. That includes limits on withdrawals and financial assessments to ensure seniors have the wherewithal to remain in their homes and maintain their homes.
"We will continue to monitor this. The changes that we made may have been sufficient to turn around that portfolio," Golding said.
Goodman said she expected a better report about the program.
"It should be doing better than it has been in the past because the changes should result in better quality loans," Goodman said.
Still, Goodman supports separating the reverse and the forward programs into two separate accounts. "They are two completely different programs," she said.
Currently, the capital ratios of the two FHA loan programs are added together in order to meet the 2% statutory capital requirement. If they are separated, it might end the cross-subsidization when one program runs into problems.
But the volatility of the reverse program is one reason policymakers are reluctant to reduce the mortgage insurance premiums on the forward program.
"Unfortunately, the reverse program has become an albatross around the neck of FHA borrowers," Chappelle said.
The "positive report on the state of FHA will most likely renew calls for a reduction in FHA fees," Stevens said. But "given the HECM volatility and recent concerns about liquidity in the Ginnie Mae market, these discussions should occur with an eye toward long term stability for the FHA program."
The National Reverse Mortgage Lenders Association is also disappointed by the audit results. "The policies, which were introduced to make HECM loans more sustainable for borrowers and to mitigate risks to the MMI Fund, include limits on upfront draws, changes to the structure of mandatory insurance premiums, and new financial underwriting requirements for borrowers," said Peter Bell, the president of the group.
"While it is still too early to see the results of the changes," Bell said, independent research shows the "new policies should cut the risk of HECM defaults in half."
That is not stopping calls for a further premium cut, however.
"We believe the door is still open for FHA to cut the premium it charges borrowers," said Jaret Seiberg, a policy analyst at Cowen and Company. "This is something that FHA can announce before the inauguration. And it would be a cut that we believe the Trump Administration would be reluctant to rescind."