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A Call to Split HECM in MMI Fund

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Institute Calls to Separate HECM in FHA MMI Fund

reverse mortgage newsNumbers, statistics and figures are the backbone of federal agencies who must account for their fiscal status each year. In the wake of the housing crash housing agencies such as FHA have come under increasing pressure and scrutiny. The recent report shows that FHA’s Mutual Mortgage Insurance (MMI) fund increased $19 billion dollars in it’s overall economic value with $8 billion being attributed to improvement in the HECM portion of the fund. The Urban Institute is pushing for the HECM fund to be separated from the general fund.

First some context. The Urban institute was founded in 1968 to understand the problems facing America ranging from poverty, tax policies and other public issues providing objective analysis. Urban suggests that the commingling of the HECM fund with the general fund is providing a distorted and misleading picture of FHA’s financial status. Further they assert the most recent ‘windfall’ may not be all that it is cracked up to be. As we stated two weeks ago on this show the fund’s improvement was not attributed dollar for dollar to increased premium collections but primarily from an improved economic forecast.

Download a transcript of this episode here.

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  1. Please excuse the technical information but the issue is whether separate accounting needs justify the need to create a new fund just for HECMs. The conclusion in this comment is a resounding NO but there may be a genuine need for better reporting.

    Ms. Goodman states: “Since 2009, FHA has calculated this value by lumping together its traditional loans and its small reverse mortgage business, or Home Equity Conversion Mortgages (HECM).” The fact is this was not a decision made by FHA but rather Congress in Section 2118(b)(2) of the Housing and Economic Recovery Act of 2008 (“HERA”, P.L. 110-289) which is now codified as 12 U.S.C. 1715z-20(i)(2)(A).

    With degrees in math and econ, no doubt Dr. Goodman is a brilliant analytical economist. What she is not is an accountant. HUD already provides a separate accounting of the HECM portion of MMI Fund which is fully disclosed and reported on in the annual actuarial report. So separating the HECM portion of the MMI Fund into its own fund would accomplish nothing as to accounting.

    What is needed is better reporting transparency which can be achieved by adding a new section after assets and liabilities called Transferred Funds. The following is a brief explanation of what caused HUD to transfer funds into the HECM portion of that fund from other MMI Fund programs (eventually HUD transferred monies from the US Treasury as well):

    Unfortunately it was not until the budgetary battle for fiscal 2010 that OMB forced FHA to not only take a strong look at the assumptions it was using in how it determined Principal Limit Factors.(PLFs) but also the value of the endorsed HECM portfolio. At the start of fiscal 2010, PLFs were decreased 10% across the board. Now came the question of HECM portfolio valuation. As it became apparent that there was a significant valuation loss, FHA transferred $1.748 billion from other MMI Fund programs into the HECM portion, not as a liability but as a contribution to its ending balance. It did this again in fiscal year 2011 but the amount was only $0.535 billion. Yet despite these transfers at the end of fiscal 2012, the HECM portion of the MMI Fund almost ended up with a $2.8 billion negative balance. So during fiscal year 2013, not only did FHA take $4.263 billion out of other MMI Fund programs but also took an additional $1.686 billion out of the US Treasury and transferred the entire $5.949 billion into the HECM portion of the MMI Fund. In fiscal 2014, FHA paid $0.770 billion out of the HECM portion of the MMI Fund and transferred it to another MMI Fund program.

    So at the end of the day, there is $6.778 billion in the HECM portion of the ending balance of the MMI Fund but 1) $5.776 billion of that comes from net transfers out of other MMI Fund programs, 2) $1.686 billion comes from a transfer out of the US Treasury, and 3) HECM lender reimbursement activity results in a cumulative net loss of $0.684 billion.

    So absolutely none of $6.778 billion in the HECM portion of the MMI Fund comes from positive operating activities but rather transfers of funds by FHA to bolster the HECM program. The separate accounting will most likely only lead to placing the HECM program into the spotlight when it cannot withstand that kind of exposure. We are much better off leaving things the way they are but with more transparency by adding (as mentioned above), the category of Transferred Funds divided into Other MMI Fund Programs and US Treasury.

    The subcategory of Other MMI Fund Programs would be positive for a MMI Fund program which received more funds than it transferred out and negative for a program which transferred out more funds than it received; these should cancel in consolidation. A separate fund for HECMs is not a good idea at this time but better transparency may be. There needs to be better reporting for the activities in the MMI Fund and adding a Transferred Funds category would help.


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