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Is the HECM Showing Signs of Premature Aging?
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The Future Of The Home Equity Conversion Program
Most 24 year olds are considered in the prime of their life but what will they look like in 30 years? Will nature and life be kind or cruel? The 24 year old federally insured Home Equity Conversion Program created in 1989 is showing wrinkles and signs of premature aging. It all began with FHA’s actuarial analysis of the insurance fund that backs HECMs or reverse mortgages and it showed that losses in home value for loans written from 2006 to 2011 will have a snowball effect. Simply put FHA is looking to see if they will have enough money to pay future claims over the next 30 years if they received no further funds. Think of it as a forced savings plan…
15 Comments
The HECM program was grossly over insured for 24 years but the abundant insurance fund was comingled in the so called “Mutual Mortgage Insurance” Fund and then squandered on forward mortgage (first time homebuyer program) defaults early on and by the time that HECM claims started to mount the fund was mostly exhausted. What it left was the impression in the minds of many that the program was unsustainable when in fact it would have been sustainable for years to come if the comingling had not occurred.
One thing is for sure at this juncture, the only thing that will keep this program functioning going forward is drastic reductions in principal limit factors that “factor” in reduced property appreciation. Four percent expected appreciation is the element of the hecm calculation that has failed us.
No amount of window dressing and obfuscation in the form of “financial assessment” and higher insurance premiums or escrow set asides are going to do the trick and the sooner we wake up to this fact the better.
Jim,
Can you please point to even one accounting or actuarial report which backs up your accusations? I have been following both the actuarial reports and the audited financial statements of the MMI Fund since the HECM program came into it.
You are not the first to make such worthless accusations but why are you doing it? Those are all myth and utter rubbish. Too many in our industry have no idea how HUD accounts for the HECM program and it is always amazing when some industry veterans who should know better join in on these false accusations.
The HECM program gained nothing and lost nothing when program accounting shifted to the MMI fund. It simply started all over with all HECMs endorsed after September 30, 2008 accounted for in the MMI Fund.
It is not the other MMI Fund programs which have robbed from the HECM portion of that fund but rather VICE VERSA. Please see my comment to Shannon especially in regard to being self- supporting and self-sustaining.
Shannon,
I enjoyed listening to your message to the industry but there are a few points which need clarification. However, while FHA is predicting a negative net position of $5.2 billion, the HECM portion of the MMI Fund will be $7 billion short of the legal mandate and $9.2 billion short of being self-supporting and self-sustaining. Here is the story why.
While most of us cringed last fiscal year in reading that the actuaries found a $4.2 billion loss for the year turning a $1.4 billion dollar accumulated surplus into a $2.8 billion negative net position.
Well, this time is not the actuaries who are telling us that the negative net position will grow by $2.4 billion this year to $5.2 but FHA itself. The actuaries per their report last fiscal year perdicted that the negative net position would go down by $131 million due to a projected surplus for this fiscal year and would end up under a negative $2.7 billion.
But what does all of that mean. The negative net surplus is an estimate; HOWEVER, by law it is the estimate that HUD uses in making its assessment of the MMI Fund. The law requires that the net position of the fund as of the end of each fiscal year be at least equal to 2% of the insurance in force as of that same date. As of last fiscal year, the actuaries predicted the insurance in force would be $93 billion as of September 30, 2013. So to be in compliance the HECM portion of the net position would have to a positive $1.8 billion. That makes the real difference between where the fund ends up and where it should $7 billion.
BUT as being self-supporting and self-sustaining, we are over $9.2 billion short. The reason is FHA transferred over $2.2 billion from other MMI programs into the HECM portion of the fund during fiscal years 2010 and 2011. NO funds have ever been taken out of the HECM portion of the MMI Fund to support other MMI programs unless FHA, the auditors and the actuaries are in collusion and are all lying to us. So if the program is short of meeting legal requirements by $7 billion, it is short of being either self-supporting or self-sustaining by over $9.2 billion.
How do we justify that to Congress? Where does the problem lie? We all know that it is in the fixed rate Standard. Sure we created our own senior welfare program at the expense of FHA. Believing that a loan of this nature can help seniors age in place (never the Congressional purpose of the program) through fixed rate Standards has devastated the very program we all support. While truly phenomenal growth in home values will help, the program is currently in a very precarious position.
Mr. Veale, It’s almost like we’re talking about two different subjects.
Mr. Spicka,
Then please explain what you mean.
The portion of the HECM fund which has been in the GI Fund remains there and many believe that since it contains the endorsements from fiscal years 2006, 2007, and 2008, it is now negative.
If we stratified endorsements into three groups some interesting things jump out. Total endorsements from October 1, 1989 to September 30, 1999 (10 years) were just 35,681 per HUD. While the upfront MIP was 2% the ongoing was 0.5%. The 2% was on much lower lending limits and the ongoing MIP was on much smaller outstanding balances. Those endorsements were so small in number and produced such few MIP revenues, they are hardly worth addressing. There are less than 1,600 of them still active.
Now let us look at the next ten years. Here is where the bulk of endorsements have been. The total HECMs endorsed in that 10 year period was over 536,700. Yet all of those HECMs were still being charged 2% upfront MIP and 0.5% ongoing MIP. The peak lending limit was which came in fiscal 2009 was $417,000 except for the mid and last part of fiscal 2009 when it was raised to $625,500.
Now let us look at the last three full fiscal years (fiscal 2010 – 2012). The endorsements were 206,527. The lending limit on all endorsements in this period was $625,500. All of them are being charged 1.25% ongoing MIP and all but Savers still have 2% upfront MIP. There were less than 8,000 Savers endorsed in that three year period.
Listening to FHA staff discuss the budget 10 days ago, one would think the problems for the HECM fund are in the HECMs endorsed prior to coming into the MMI Fund, particularly when it comes to the loss in value on collateral related to HECMs endorsed between October 1, 2005 and September 30, 2008. The group with the highest potential MIP per endorsement is in the last three years for two reasons: ongoing MIP rates increased so dramatically and the vast majority of fixed rate HECMs are in those years (meaning full draw HECMs to charge the ongoing MIP on). In fact, 141,361 of all 157,406 fixed rate HECMs endorsed are reflected in those three years of endorsements.
So I do not understand your claim that “the HECM program was grossly over insured for 24 years but the abundant insurance fund was comingled in the so called “Mutual Mortgage Insurance” Fund” at all. Further where are your grounds to state that then “the abundant insurance fund was … squandered on forward mortgage (first time homebuyer program) defaults early on and by the time that HECM claims started to mount the fund was mostly exhausted?” We knew by early spring 2009 that OMB was telling HUD that the book of endorsements for fiscal 2010 had an inherent loss of $798 million which we are now finding out was far too low of a loss estimate. The program is in trouble and has been known to be for the last four plus years.
I should quickly caveat all of my comments and replies in this thread by saying that the views expressed in them are not necessarily the views of Security One Lending or its affiliates.
Explained to perfection. Rising home values from 2013 and on solves the entire problem. Just when housing is turning upwards again, NY and NJ coastline — over 200,000 homes are destroyed or damaged so heavily that values along the shores have dropped fast. Now seeing areas of $400,000 homes now selling at $100,000 to $200,000 and this is hurting local, and state averages greatly, as well as comps in nearby areas. Conversely, towns not hit and nearby are rising sharply, as they run out of available housing as Sandy victims RENT there. Many, especially on Long Island, NY, are just taking what they can and leaving.
Mike,
Home values have been increasing since at least 2011. That fact has not been lost on the Commissioner or the actuaries.
Like too many others, you do not show you have read the report of the actuaries for last fiscal year. They believed so strongly in home values increasing that they projected that what the Commissioner recently stated would be a negative $5.2 billion net position for the HECM portion of the MMI Fund would be a negative $2.668 billion. They projected the negative net position of the HECM portion of the MMI Fund was $2.799 billion at the end of last fiscal year.
Your idea of improving home values in this fiscal year means a difference of $2.532 billion loss in this fiscal year. Do you really understand the need to stratify these alleged increases, market by market?
Like the value of real estate is dependent on three key criteria (location, location, and location) so does the analysis of the HECM portion of the MMI Fund.
As to the remaining portion of your comment, one hardly knows how to comply except to say our prayers with those who lost so much.
The statistics are dazzling and presumably tell us something. How does this plethora of data help us preserve the HECM program?
What do you recommend? What needs to change to salvage the program?
I made a few suggestions, do you agree or disagree with them?
Mr. Spicka,
The answer should be obvious. You offer some fingers for the dike but the pressure on the breach is still there and growing.
It is time for a much bolder move. Per the report of the Commissioner, FHA needs to bring in over $7 billion into the HECM portion of the MMI Fund just to meet the 2% capital reserve requirement. If the other programs are to receive back what they have allocated to the HECM fund the amount would have to be in excess of $9.2 billion.
Where can FHA get that kind of money and if they do, what kind of Congressional pressure will the program be under? There are NO easy cures. The Commissioner was very assuring not long ago that things would not get much worse. Well, they are and Congress does not seem pleased.
Will Congress allow the other MMI Fund programs to continue carrying the HECM program? And if so, for how long? Does the HECM program need to survive? We will all say “yes” but why did our industry encourage a way of continued damage to the program?
Some of us were asking these questions in 2007 when the fixed rate HECM was first introduced. Our voices were downed out then. The best cure was then but the cat got out of the bag and the damage has been done. So where is the fix for the problem from the sages who downed out the voices of concern then? Most of them are gone; they seem to have taken the purported fix with them.
Mr. Veale, Agreed for the most part.
But please, what is the “Much Bolder Move” that you think is necessary?
We can’t change the past but we can stop doing the same thing each and every day and expecting a different outcome.
I am only referring to restructuring the program to make it far less generous, not to the ill conceived and ill advised “financial assessment”, MIP increase, tax and insurance escrow and other window dressing.
WHERE IS OUR PRIVATE LENDERS ????
IS THE RISK REALLY THAT HIGH ????
Agreed
Mr. Veale,
The government (taxpayer) is on the hook for the shortfall whether Congress likes it or not. Hud failed to confront the HECM calculation assumption problem that was obvious back in 2007 and our industry “leadership” assisted in perpetuating the problem. The calculation assumptions don’t work without housing appreciation so how could anyone have thought there could have been a different outcome.
There can and should be a HECM program, whether public or private but it must be structured to account for low property appreciation and rising interest rates which means it must be much less generous.
Unfortunately many of those responsible for our current state of affairs are still with us.
Mr. Spicka,
The bold move would be 1) to take $9.4 billion (or whatever it is at the time of the taking) from the Treasury; 2) then to repay the $2.2 billion plus earnings to the other MMI Fund programs; 3) to divide the net position of the HECM portion of the MMI Fund into two portions to track the portion of the net position of HECMs endorsed before October 1, 2013 and HECMs endorsed after September 30, 2013; 4) to repay the Treasury up to the full amount taken if after a period of aging to the extent the net position is positive beyond approximately $1.8 billion (i.e., 2% of the insurance in force as of September 30, 2013) under a more specific plan yet to be defined; and 5) to begin working on both a Saver and a Standard Hybrid which have flexible rules restricting full draws in the first two years following initial funding.
Perhaps Standard PLFs need to be lowered beginning on October 1, 2013; however, such strategy should be coordinated in consultation with the actuaries together with the other program adjustments FHA will put in place by the beginning of next fiscal year.
While I support the aging in place concept, it is far less than fully compatible with the codified purpose of the HECM program. So while many in the industry question the appropriateness of financial assessment, it seems odd that it was never put into the approval process years ago. It also seems the MetLife effort was totally incompatible with the purpose of the HECM program. The NRMLA proposals are far more logical and seem very much in line with the purpose of the program despite their well documented flaws.
While the fixed rate Standard helped the industry and investors, its value to seniors and FHA could not be justified in a financial sense when considered in line of the purpose of the program. To insure a mortgage which forces large sums of unneeded cash on seniors was and remains a very questionable policy decision for FHA to account for, especially when there was no validation of whether or not the recipients were capable of prudently using such significant sums.
We are in a different age and now it is time to work with FHA to grow the HECM program in a prudent manor.