Stop Overcharging FHA Borrowers to Subsidize Reverse Mortgage Risks
It will apparently surprise some in Washington that, had the FHA not used the single-family mortgage insurance program to subsidize Homeowners Equity Conversion Mortgage, it would already have surpassed the 2% minimum statutory capital requirement mandated by Congress.
The Federal Housing Administration has made net transfers of $4.3 billion since fiscal year 2010 to the HECM financing account "to cover the increase in expected losses" in the reverse mortgage program.
Instead of confirming that the FHA's flagship program has weathered the worst financial crisis since the Great Depression at no expense to the American taxpayer, the actuarial review of the Mutual Mortgage Insurance Fund for fiscal year 2015 offers the misleading impression that the forward portfolio's all-important capital ratio is still below 2%.
(The fiscal year 2013 $1.7 billion mandatory appropriation — or "bailout" as the critics refer to it — was also tied exclusively to the HECM program.)
As the FHA's founding fathers intended, it was the 7 million homeowners who have obtained FHA-insured loans after the housing crisis who have funded the administration's recovery.
Since the FHA's basic program is built on the principle of self-sufficiency, we should not lose sight of the fact that its turnaround was achieved by charging record-high premiums to these borrowers, many of whom were first-time, lower income and minority homebuyers.
While the fiscal 2015 actuarial review of the FHA's forward portfolio is very positive in spite of the transfers to the HECM program, the latest facts on the administration's financial condition are even better.
The forward program is already running ahead of the fiscal 2016 actuarial projection of adding $7.9 billion to the Fund according to recent Congressional testimony from FHA Principal Deputy Assistant Secretary Ed Golding.
The fiscal 2015 actuarial review also underestimated the FHA's 2015 forward volume by $20 billion; using the actual volume would have increased the forward volume's economic value another $1 billion last year.
In the first quarter of fiscal 2016, the number of FHA claims was 65% less than the actuarial projection, continuing the positive trend of the last five years.
FHA's total delinquency rate in 2015 is the lowest in 15 years according to the Mortgage Bankers Association's National Delinquency Survey and new originations since 2011 have the lowest early default rates in the 17-year history of the FHA's Neighborhood Watch database.
At the root of the FHA's continual improvement is the outstanding credit quality of the forward mortgage portfolio.
There has been a steady influx of borrowers with higher credit scores (680 and above) since 2009. Those books are now almost 90% of the administration's portfolio and the problem books of fiscal year 2005-fiscal year 2008 are less than 10%.
It's no wonder the Department of Housing and Urban Development concluded in its fiscal 2015 annual report to Congress: "We expect that steady improvement in the value of FHA's Forward portfolio is repeatable and sustainable."
The FHA's core homeownership program is well on the way to accumulating a $30 billion surplus in 2016, thanks to the $4 billion of transfers to the reverse program, the $1 billion of additional fiscal year capital, the continued decline in claims below actuarial predictions, and the historic credit quality of the portfolio.
This capital level is significant because, as FHA also said in its annual report to Congress, $30 billion is the reserve necessary "to withstand the level of losses sustained in the last crisis."
Yet, FHA's mortgage insurance premium still remains at historically high levels because of the unpredictability of the reverse mortgage program.
The reverse program's uncertainty is largely tied to inherently volatile projections about home prices and interest rates used for discounting future cash flows.
Just how sensitive they are is demonstrated by the $10 billion swing in HECM capital as a result of interest rate volatility in the last two actuarial reviews.
The good news is that both of these factors look encouraging for fiscal 2016. The interest rate impact, in particular, is expected to be "very small" according to a recent Urban Institute analysis. In its April report, CoreLogic stated that its Home Price Index increased 6.8% in the last year and the HPI forecast for the next year exceeds 5%.
Some would argue that any further premium reductions would expand the FHA's market footprint and crowd out the private sector. While I am sympathetic to the plight of the private mortgage insurers, their gripe is not with FHA, but rather with the high fees (particularly loan-level price adjustments) assessed by Fannie Mae and Freddie Mac.
Said another way, why should the FHA overcharge its borrowers just because Fannie Mae and Freddie Mac do?
To make matters worse, FHA borrowers are being asked to continue paying very high insurance premiums to backstop a reverse mortgage program that has a different mission, risks and financial outlook.
While the FHA's premium reduction last year was a positive step, total premiums can still be more than $30,000 higher on the average FHA loan than pre-crisis premiums when the life of loan requirement is considered.
First-time homebuyers face enough challenges to qualify for a mortgage in today's housing market without having to subsidize the reverse mortgage program.
Brian Chappelle is a founding partner of Potomac Partners in Washington.