7 Takeaways from FHA’s Annual Report to Congress

7 takeaways from FHA’s report to Congress

Each November our industry eagerly awaits the release of FHA’s Annual Report to Congress on the status of FHA’s Mutual Mortgage Insurance Fund, and more specifically, the HECM’s performance. Today we will look at seven key takeaways from that report.

First- Over half of all HECMs were originated in 10 states.

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California is truly the golden state when it comes to HECM originations ranking in first place for all federally-insured reverse mortgages since 2009. According to the Independent Actuarial Review for Fiscal Year 2021, over half of all originations came from the following states: California, Florida, Arizona, Colorado, Texas, Washington, Utah, Oregon, New York, and Nevada. Today, these states account for 71% or nearly three-quarters of all HECM origination volume.

Second, Maximum claim amounts surged with home values. A surging housing market amid the pandemic boosted HECM Maximum Claim Amounts to a staggering average MCA of $433,870, up from $389,378 in 2020. The geographical concentration of maximum claim amounts means that the future performance of the HECM and its economic value will be heavily dependent on home price appreciation or depreciation in a handful of states which include California, Florida, Texas, Pennsylvania, and New York.

Third- The real estate market is king. When it comes to the HECM’s capital ratio inside FHA’s Mutual Mortgage Insurance Fund the impact of home prices significantly outweighs other factors. In fact, the MMIF capital ratio is three times more sensitive to a mere one-percent decrease of home price appreciation than a one-percent decrease in interest rates.

Fourth- A backlog of mortgage forbearances remains. Foreclosure moratoriums have been extended repeatedly since the beginning of the pandemic. While many borrowers have come out of forbearance there is still a sizable cohort of loans that could emerge from forbearance in the next six months which could strain the capacity of FHA and negatively impact the overall MMI Fund.

Fifth- Both the forward and HECM program’s capital ratios have dramatically improved. Since 2017 the forward stand-alone capital ratio inside FHA’s MMI Fund has doubled to a positive 7.99 percent. The HECM portion dug itself out from a negative 18.30 percent in 2017 to a positive 6.08 percent The improvement of the overall FHA capital ratio to 8.03%, which is well above the Congressionally-mandated 2% threshold, has led to renewed calls to reduce FHA insurance premiums for first-time homebuyers.

Sixth- Problematic HECMs originated between 2009-2013 are dwindling. The popularity of fixed-rate full draw HECM loans in the years following the housing crash of 2008 were problematic increasing assignments and payouts from FHA’s insurance fund. The good news is that cohort of vintage loans has decreased significantly.

Seventh- Type 1 insurance claims where HECM properties were sold at a loss have steadily dropped since 2015. In addition, low interest rates are slowing Type 2 claims which are for the assignment of HECM loans that have reached 98 percent of their original maximum claim amount.


Is the HECM Durable or a Drain?

Despite improvements, the HECM remains a reliable target of fiscal scrutiny

In its Fiscal Year, 2020 Financial Report the Department of Housing and Urban Development called out the HECM program saying it ‘undermines’ the financial soundness of FHA’s Mutual Mortgage Insurance Fund which backs both HECMs and traditional FHA loans. There have also been repeated statements that the program is being subsidized by traditional FHA mortgages- a claim that has been recently challenged in a recent blog post by New View Advisors writing,

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“We think Forward Mortgage does not subsidize Reverse Mortgage now any more than Reverse Mortgage subsidized Forward Mortgage in 2009. A true subsidy would mean outsized realized HECM losses, and a compelling case that this will continue. This is not demonstrated in the report.” New View concluded by referencing a recent revision to the Actuarial review of FHA’s insurance fund. That revision increased the HECM’s economic net worth in the MMI fund from a negative $5.4 billion to a positive $1.268 billion. That revision was made after Jim Veale- an industry watcher and HECM originator contacted Pinnacle Actuaries in late November. Veale noted a discrepancy between the actuaries calculation of Total Capital Resources of a negative $5.64 billion versus a positive $1.597 billion shown in HUD’s report to Congress. As a result, Pinnacle updated their report which now has added $7 billion dollars to make the HECM’s economic net worth a positive $1.2 billion. This strengthens the argument that the HECM is presently not a drag on the overall FHA fund which backs the program.

Looking back the HUD’s recent annual report released December 4th, one area of concern that rightly deserves focused effort and attention is monitoring the servicers of loans that have been been placed into assignment with HUD. That oversight is crucial as HUD states the majority of losses from Type 1 claims are the result of the borrowers no longer occupying the home as their primary residence (or in some cases even living in the property at all) and the failure to pay property charges such as taxes and insurance. Such instances call for active and prompt intervention by assigned HUD servicing vendors to preserve the economic values of properties, and preventing occupancy fraud- both which stand to substantially contribute to continued and avoidable insurance claims and losses.

HUD Secretary Ben Carson’s comments became somewhat political in the December 9th official HUD press release which accompanied the agency’s financial report which reads in part, “When an institution becomes insulated from the success or failure of its policies, it loses its incentive to operate efficiently. Private businesses, while engaged in different work than the federal government, do not have the luxury of being protected from their failures or maintaining damaging courses of action,” adding, “Irv Dennis was able to accomplish the impossible task of providing the financial stability that had gone left unchecked for so many years.” Keep in mind, January will bring us a new administration and agency heads which are certain to have a direct impact on housing policy and the HECM program.

Setting politics aside much has been accomplished to improve the HECM program since the great recession of 2009. However, merely increasing oversight of lenders. “HUD must strengthen its effort to ensure that the lenders participating in the HECM program comply with its regulatory and administrative requirements and minimize claim costs” reads the agency’s 2020 financial report. With very few notable exceptions, HECM lenders have worked closely with HUD to ensure ethical and efficient lending to today’s older homeowners. Chances are that the largest liabilities to the economic value of the program can be found in the servicing of assigned loans for non-compliant borrowers as mentioned earlier, and reexamining the structural change of upfront FHA insurance premiums charged made in October 2017.


Podcast E644: HECM Program Improves Despite COVID

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HECM Program Improves Valuation in FY 2020

In the early spring, the American economy was nearly flattened by shut-downs and shelter in place orders across the nation as a result of the COVID-19 pandemic. Ironically- despite this massive market interruption, FHA’s most recent report to Congress on the financial status of FHA’s Mutual Mortgage Insurance Fund reveals significant improvement in its capital position. Is this surprising?

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BREAKING: FHA Annual Report with Narrated Video Summary

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FHA’s 2020 Report Shows Marked HECM Improvement

During NRMLA’s Virtual Annual meeting last week. Deputy Secretary of Housing and Urban Development Brian Montgomery’s comments last Tuesday reinforce a common theme heard since 2009. Viability. Referencing the continued strong demographic demand for HECMs Montgomery said, ‘so long as the program is built to be viable. He added, “In the end, we must protect seniors who depend on the HECM while ensuring our program’s financial strength can endure market cycles without taxpayers picking up the bill.”

In the effort to avoid the HECM requiring further subsidies to remain economically viable HUD & FHA have an established history of pulling to levers to reduce the program’s risk of future losses or insurance claims: reduced principal limit factors, and restructuring FHA mortgage insurance premiums. Other measures included the elimination of HECM products, financial underwriting requirements, and reducing the interest rate floor. Weeks following the unwelcome October 2017 HECM PLF cuts were enacted key one industry leader pointed to unaddressed problems in the ‘back-end’ of the program- specifically a backlog of unprocessed HECM loan assignments- this months prior to the appointment of FHA Commissioner Brian Montgomery. In May 2019 Montgomery announced the good news that the backlog of HECM claim assignments was clear and expressed cautious optimism of the program’s future financial viability.

While industry watchers were grateful that the logjam of assignments had been cleared, many expressed continued concerns of continued servicing issues from HUD’s appointed servicer citing abandoned properties, unauthorized occupancy of homes by relatives, and the deterioration of properties securing the loans that languish as REOs or real-estate owned properties.

However, in the short term, there’s good news.

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Strong home appreciation throughout the fiscal year 2020 and low interest rates. Higher home values increase the equity buffer between a HECM’s loan balance and the asset or home value and low interest rates help slow that gap being closed by accrued interest and negative amortization. Knowing these economic conditions help to significantly improve the HECM’s Net Present value it’s logical to conclude we are facing significant risks- especially should the housing market erode in the coming year. In his presentation last week Montgomery cautioned, “While I believe there are positive effects of both our policies and a robust housing market, the coronavirus and loss of employment have produced serious headwinds. We know that pro-cyclical forces can provide a false sense of security.” He also referenced stress tests. Stress testing models how a bank, corporation, or the FHA insurance fund would potentially perform under several potential economic events. This would of course necessitate modeling some negative ‘what-if’ scenarios which include rising interest rates, falling home values, One number that will be an asset when stress-testing the HECM portion of in-force insurance in the MMIF is the HPA or Home Price Appreciation rates. The average quarterly HPA from 2011-2019 was 1% or an adjusted average of a four-percent annual home appreciation rate. 2020 home values are certain to push that number significantly higher.

The HECM has numerous challenges when attempting to determine economic viability. It’s valuation and future claim payouts are extremely sensitive to home appreciation/deflation and interest rates. For a better idea of the HECM program’s current economic viability here’s short summary of HUD’s Annual Report to Congress released just this last Friday.

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


The 2019 HECM FHA Report to Congress

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What you need to know about FHA’s Report to Congress on the Home Equity Conversion Mortgage

[Download transcript]
Each year reverse mortgage lenders, originators and other mortgage market participants eagerly await the release of the Federal Housing Administration’s report to Congress on the financial status of the Mutual Mortgage Insurance Fund.

The good news is that the valuation of the HECM portion of FHA’s portfolio improved by over 50% in a single fiscal year from a negative valuation of -$13.63 billion in 2018 to a negative $5.92 billion in 2019. Why are we seeing such a rapid and marked improvement?

The comments of FHA Commissioner Brian Montgomery during a press call last Thursday may shed some light. “The improvements we’ve begun to put in place in the last two years to stem the losses of the reverse mortgage portfolio, aided by favorable economic conditions, are contributing to some improvements in our reverse mortgage portfolio.”

FHA’s MMI Fund Report Explained

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[Download full report] [View 1-minute video summary] [Full Actuarial Review
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A look behind the numbers and factors that shaped the FHA MMI Fund Report to Congress

A recap of FHA’s and HUD’s media conference call, an examination of HECM risks, and how the value of the fund is calculated.

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BREAKING: 2018 FHA HECM MMI Fund Summary

FHA Annual Report MMI HECM

[Download full report] [View press release summary] [Full Actuarial Review

Modest improvements and continued economic losses to the HECM portion of FHA’s MMI Fund

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