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Why California is the future of the HECM Fund

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Why California will shape the future of the HECM in FHA’s Insurance Fund

A few things are undeniable and established truths; one being the valuation of FHA’s Mutual Mortgage Insurance Fund is extremely sensitive to even the most modest changes in home price appreciation. Don’t blame the messenger. Blame the math. The mathematical assumptions where a mere 1 drop in home appreciation reduces FHA’s insurances fund’s capitalization ratio by 1.3%. Applying a hypothetical stress test FHA’s report to Congress reveals market conditions similar to 2007 would completely erase the Mutual Mortgage Insurance Fund’s positive six-percent capitalization ratio down to a negative .63 percent.  Knowing this it’s easier to understand the agency’s reluctance to grant repeated requests from housing lobbyists to further reduce premiums. It’s clear that a higher capitalization ratio is needed to weather the storms of economic uncertainty.

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Today much of that uncertainty is focused on the long-term impacts of the coronavirus pandemic on the American economy- more specifically unemployment. After all, it’s employment that is the linchpin of the housing market. After all it’s difficult to make your mortgage payment without a full income. Though receiving less attention than the overall improvement of the fund’s improvement in valuation FHA’s report addresses three potential risks that could boost future claims: First is a reversal of home price appreciation (a fall in values) triggered by a flood of distressed properties coming on the market. FHA reports to have over 900,000 loans in serious delinquency- those are loans over 90 days delinquent. Second, are more unemployed borrowers than projected. These homeowners would place strain on the fund not being eligible for loss-mitigation having no income to resume making monthly payments. Third, too many borrowers opting to take a full twelve-months of mortgage forbearance under the CARES Act which terminate in a short period of time. The report states “A gradual unwinding of forbearance would be a preferred outcome, as it would be less likely to cause the market disruptions”.

Two other market risks should be noted. First, is the ‘California Factor’. FHA’s annual report notes that federally-insured reverse mortgages are much more geographically concentrated than their traditional FHA counterparts. California alone represents just over 35% of all endorsed HECM loans based on Maximum Claim Amounts.  The other 25% of total MCA volume comes from Florida, Colorado, Arizona, and Washington State- this means five states account for sixty percent of HECM endorsements by MCA in 2020. “As a result, future HECM performance will most likely be more reliant on economic factors such as house price appreciation in these concentrated states, particularly in California where the share of HECM MCA is almost five times greater than Colorado, the state with the second-highest share at 7.38 percent.” To monitor the future financial health of the HECM portion of FHA’s insurance fund, look to future home value trends in these states, especially California.

Next week we will examine the 2020 Actuarial Review of the HECM portion of the MMI Fund, more specifically we will examine why despite rising home values and low interest rates potential causes of why the HECM’s valuation actually dropped significantly since October 2017 HECM changes. In the meantime, we leave you with the words of Seneca- “The whole future lies in uncertainty – live immediately”. Let’s find what can be accomplished today and approach it with vigor and tenacity.

FHA’s Report to Congress on the Financial Status of the Mutual Mortgage Insurance Fund [READ]

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