The fundamental conclusion of the Fiscal Year 2017 Actuarial Review is that the financial problems of the FHA Home Equity Conversion Mortgage program keep getting worse. Exacerbating this problem is its impact on millions of homeowners in FHA's flagship single-family program who are still paying very high insurance premiums for the life of their FHA loans to subsidize the operations of the reverse mortgage program.
HUD had it right in its August statement announcing needed changes to the HECM program. At that time, HUD said "younger, lower-income homeowners are routinely bailing out the HECM program through the mortgage insurance premiums that they pay."
A recent National Mortgage News article highlighted the current problems of the reverse program and their adverse impact on the FHA's long-standing single-family program.
Removing reverse mortgages from the Mutual Mortgage Insurance Fund is the obvious and fairest solution to this problem. HUD Secretary Ben Carson called it a "worthy pursuit" in response to a question at his recent congressional testimony. The reverse mortgage program could be moved to its own fund or returned to the General Insurance Fund, a fund that HUD has said is designed to "address specialized financing needs."
It is not like the reverse mortgage program has been a part of the fund for a long time. Talk about bad timing, it was only added to the fund at the height of the housing crisis in 2008. It would be analogous to requiring a property insurer to backstop another insurer in a hurricane-prone area just as a Category 5 hurricane was about to make landfall.
Almost immediately, the reverse mortgage program was a burden for the fund and the millions of FHA homeowners. Starting in FY 2010, the FHA's single-family program began making net transfers to the reverse program that totaled $4.3 billion. Of course, the fiscal year 2013 $1.7 billion mandatory appropriation — or "bailout" as the critics refer to it — was tied exclusively to the HECM program.
In contrast to the problems in the reverse mortgage program, the FHA's forward program has rebounded steadily since the housing crisis. As HUD stated in its FY 2017 Annual Report to Congress, "By a wide range of measures, the credit performance of the forward program has improved significantly."
Particularly noteworthy this year was the 23% growth in the FHA's single-family capital resources from $30.2 billion to $37.1 billion. In 2015, HUD had said that the FHA needed $30 billion of reserves to withstand another Great Recession.
The principal reason for this growth in cash reserves was the sharp decline in program expenses, primarily claim payments. Claim expenses that had been as high as $27.5 billion in FY 2013 were $10.9 billion in FY 2017 resulting in an almost $13 billion turnaround in net cash flow from -$6.4 billion to +$6.4 billion over the same period.
What makes this transformation in capital even more meaningful is that it is based on what actually happened in FY 2017 rather than predictions about what might happen in the future. As HUD also said in its FY 2017 report, the FHA's single-family capital reserves are "known and audited at the end of each fiscal year."
At the root of these declining program expenses has been the turnaround in the credit quality of the FHA's portfolio. The problem books (FY 2005 to FY 2008) with the worst-performing loans are now less than 5% of the FHA's portfolio and the loans insured since 2009, which now comprise 90% of the portfolio, are performing better than expected with arguably the best credit quality in 40-plus years.
Add in the fact that the seller funded down payment assistance program, which Congress eliminated in 2008 and cost the fund over $17 billion, is now less than 3% of the portfolio. It is no wonder that the prospects for the single-family portion of the fund are so promising.
In conclusion, the reverse mortgage program has helped tens of thousands of seniors to tap the equity in their homes to improve their quality of life as they age and the government should certainly play an important role in meeting this need.
At the same time, as HUD noted in August, FHA homeowners, many of whom are lower-income, minority and first-time homebuyers, are paying a steep price to bail out the HECM program.
Let's also not forget that these borrowers already face financial challenges of their own. Whether it is paying off student loans or saving so their children won't have them, they are confronted with a myriad of daily expenses that are squeezing their family budgets.
HUD Secretary Carson definitely had it right when he said removing the Home Equity Conversion Mortgage program from the MMI Fund is a "worthy pursuit."