HECM Changes & The Ensuing Crash

Shannon Hicks October 2, 2017 9

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HECM Changes & the Ensuing Crash in Volume

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Since it’s introduction in the late 1980’s the Home Equity Conversion mortgage was a collateral-based product. In recent years the reverse mortgage or HECM has shifted from a loan based on the homeowner’s equity and age to a fully underwritten mortgage requiring borrowers to prove their financial capacity to pay property taxes and insurance.

Not surprisingly, these changes narrowed the potential market for the reverse mortgage and volumes have dropped by more than 50%, in part to the housing crash and numerous lending ratio reductions and financial underwriting requirements…
Download the video transcript here.

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9 Comments »

  1. john brodey October 2, 2017 at 7:33 am - Reply

    Great piece Shannon. Well done! Obviously, it is a no brainer for those of us in robust markets like the Bay Area, to question policies that have a blanket application to every region of the country. To say the same calculations should apply to such disparate areas as L.A. County and Oklahoma is ridiculous. The decline in business here and in east coast population centers will be increasingly disproportionate to the decline in the midwest and south. We will bear the brunt of a further PL dropoff and the HECM will continue to be even less attractive to homeowners here who have significantly higher equity positions in their homes than so many other markets.
    Thanks

    • Shannon Hicks October 2, 2017 at 11:22 am - Reply

      Thank you kindly, John. Having regionally-adjusted PLFs is a radical idea, and one I believe would more adequately address HECM crossover/MMI fund risks. I know of a select few who have floated such an idea, but it’s never been published to my knowledge.

  2. Ray Fry October 2, 2017 at 10:33 am - Reply

    I’ve always wanted to know how much money has been paid into the insurance fund from the HECM program and how much money has been paid out since the program started. I understand the value of looking forward and trying to prevent future financial problems and I try my best to do that for myself and my family. However, the actions I take to protect my financial future are dependent on my current financial position.
    Have the HECM insurance fund really lost money or do we have a surplus that should be used to offset future losses?

    • James E. Veale, CPA, MBT October 2, 2017 at 3:12 pm - Reply

      Mr. Fry,

      What do you mean by how much money has been paid into the insurance fund from the HECM program? No monies have EVER been paid from the HECM program into any insurance fund. Second what insurance fund are you talking about? You have lost me.

      I am sure you believe you have asked an intelligent and serious question but it is anything but. You need to understand what the HECM program is from a very pragmatic point of view.

      Sit down with your close friend Mr. David Chee, also a CPA, and start addressing your questions. There are two insurance funds that account for the insurance program. One such fund is the General and Special Risk Insurance (GSRI) Fund. All HECMs endorsed before 10/1/2008 are accounted for in that fund except to the extent they are in the unassigned pool following assignment to HUD. All HECMs endorsed after 9/30/2008 are accounted for in the Mutual Mortgage Insurance (MMI) Fund again except for those HECMs which have been assigned and are now in the unassigned pool.

      All MIP is paid by servicers into the US Treasury and earmarked for either the GSRI Fund or the MMI Fund. When it comes to cash, the HECM program is nothing more than a subfund of those two funds. Neither fund has any cash; it is all received, paid out of, and held by the US Treasury.

      HERA of 2008 passed by a Democratic led Congress and signed into law by G W Bush required the accounting for post fiscal 2008 endorsed HECMs to be done in the MMI Fund. Why? I believe Chairman Barney Frank explained that to Mr. Peter Bell and thus Mr. Bell is a better source on that subject.

      If you want to know how FHA accounts for that cash flow, I cannot help you except to some degree as it pertains to the MMI Fund. All GSRI Fund accounting is fairly opaque since there is no separate accounting for the HECM portion of that fund posted on the HUD website or otherwise available to the public that I am aware of.

      But if you want a very difficult task you can go to the annual management report to Congress by FHA for the fiscal 2016 at the following URL:

      https://www.hud.gov/sites/documents/FHAFY2016ANNUALMGMNTRPT.PDF

      There you might glean some information about the HECM portion of the GSRI Fund as I just did but how to put all of the pieces together is government accounting which I am as familiar with as you.

      As to the MMI Fund, go to the FHA Annual Report to Congress on the Financial Status of the FHA MMI Fund for fiscal 2016 dated 11/15/2016. You can get a copy at:

      https://www.hud.gov/sites/documents/2016FHAANNUALREPORT1.PDF

      Get out your hankie and start at Page 33 where you will find the cash flow picture of HECM program since fiscal 2012. Remember the HECM program was switched to the MMI Fund on 10/1/2008 and so you will only find information on endorsements after 9/30/2008. if you have time go the HUD website where you will find all such reports for fiscal year 2009 through fiscal year 2016.

      Now if you really want insight into how the MMI Fund portion of the HECM program can be analyzed go to the actuaries reports on just the HECM portion of the MMI Fund at

      https://www.hud.gov/program_offices/housing/rmra/oe/rpts/actr/actrmenu

      Good luck and let me know what you find.

      ADDITIONAL INFORMATION

      This is an insurance fund. It does not have the privilege of knowing how its first year of business actually did until all of the loans TERMINATE for that year.

      As of 2012, I knew how many loans were ACTIVE and outstanding for each year of the program until HUD stopped publishing that report (HECM Characteristics Report). To be clear not one single fiscal year had closed all HECMs endorsed in that year. That was as of 9/30/2012. That means for HUD and Congress to understand how much money will be needed to fund the program year by year, estimates must be made of the gain or loss that the total HECMs active will result in along with those in the unassigned pool. It is this estimation that the actuaries perform but they only do that for the HECMs in the MMI Fund. Who does it for the GSRI fund and the unassigned pool? You will probably have to ask HUD executive administration in DC.

      For now that is the best I can do for you. Good luck with that homework. Please say “Hi” to Mr. Chee for me. He will love that I have drafted him for this task.

    • James E. Veale, CPA, MBT October 5, 2017 at 12:50 pm - Reply

      Mr. Fry,

      I am glad I got to apologize to you by phone today before posting this public apology regarding my comment directed to you at the start of this thread showing a time stamp of 10/2/2017 at 3:12 pm PDT.

      What I feel in general about the reaction of the industry towards Mortgagee Letter 2017-12 should never have been directed at you. You are a good man and simply admitting your lack of understanding. That is a brave step in the right direction.

      My anger is toward those industry vets who have for too long complained about actuarial reporting without understanding either its business purpose or its validity in measuring the ultimate outcome of a cohort of endorsed HECMs. These vets seem to love to complain but do not do what YOU DID, ask for help in trying to understand HECM accounting.

      My prior comment as to you was misdirected and clearly wrong. I will gladly help you any time you would like it.

      Sincerely,

      Jim Veale

  3. James E. Veale, CPA, MBT October 2, 2017 at 5:26 pm - Reply

    Shannon,

    You did a great job of laying out the skeleton of the issues.

    Years ago, in a lengthy debate with Joe Kelly in comments and replies on Reverse Mortgage Daily, we went head to head on this problem. We agreed the collateral value was a huge black hole and could only effectively be addressed by specific location or perhaps MSA.

    The problem is this would have to be done at least annually and what would the cost be? He had some suggestions but quite frankly HUD and many industry observers do not want to consider the consequences or the costs to do that work. Congress would probably choke on the bids to estimate the collateral on that basis for such a little speck in the federal budget.

    In our phone call today we addressed how to approximate an appraisal using an automated vendor such as Zillow. Perhaps without too much cost HUD could contract with a company like Zillow (or use averages with an additional vendor) to gain a better understanding of the value of its collateral. Even if HUD only did that for a couple of years, it could see if there was value from engaging in such an exercise. Initial input, review, and correction time could be massive but once in the system, only the changes in each fund during the fiscal year would have to be inputted into the related software(s).

    • Shannon Hicks October 3, 2017 at 7:30 am - Reply

      Jim- Thank you. I agree that the benefits of MSA pricing would be more effective for risk management. I would also add more equitable for originators and borrowers in MSAs with higher appreciation rates. I agree that a pilot program testing the required technology and modeling the results would be beneficial.

  4. rich littlefield October 6, 2017 at 11:05 am - Reply

    I have to express doubts about the projections that are used by HUD. I have my doubts that they gotten it right. I think they are missing the bigger picture of demographics. Right now we have a baby boomlet in the population known is generation Y. If I am correct they are only taking into account the result of the baby bust known as generation X. An easy mistake to make, but then they are going to come up with the wrong numbers, which I believe they have.

    • The_Cynic October 9, 2017 at 11:20 pm - Reply

      Rich,

      America and her freedoms are great. One of the best is free speech but that is exactly what is wrong with, it is FREE. Quite frankly I have no idea what you are talking. Please describe how Generation Y works into the “projections” and then tell us how they should work into the “projections.”

      I have no idea what you are talking about and I strongly believe, neither do you. While I appreciate you exercising your right of free speech, you are also expressing a huge amount of misunderstanding (dare I say ignorance?).

      Based on your belief please provide the formula where HUD is mistaken and please provide the corrections needed. Thank you.

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