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One industry observer noted a difference between HUD’s Annual Report to Congress and the actuarial review of the HECM in FHA’s insurance fund. Here’s how a $7 billion difference was found and why.
FHA & HECM Loan Limit Increased again: Some cheer others express concern
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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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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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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.”
As one commenter on HECMWorld put it ‘The HECM program got through the hearing all but unscathed’. Very true considering our long history of continued reductions in Principal Limit Factors and restrictions on how proceeds are distributed. That being said, we have several significant HECM changes that have yet to be finalized or announced with an implementation date which has many of our viewers asking when if these changes will be finalized, and if so when.
Of the three most notable changes, two are legislative requiring Congressional approval. The first is an unnamed pending House resolution which would eliminate the national lending limit for HECMs and instead revert back to county-by-county lending limits- or the FHA area maximum loan limit. How such a change would reduce FHA’s risk exposure from HECM loans remains to be seen. Homeowners with higher valued homes in rural counties stand to be impacted the most.
The second would be the removal of the HECM from the
The updated Housing Finance Reform Plan is ambitious in both its scope and impact on the housing industry and more particularly reverse mortgage industry participants. One of the proposed changes to the HECM (Home Equity Conversion Mortgage) is the removal of the national loan limit and a return to the county-by-county structure of yesteryear. Such a change requires Congressional approval.
[ FHA MORTGAGE LIMIT CALCULATOR ]
In 2019 HUD increased lending limits for most counties across the U.S. However, those unfamiliar with the localized caps may be surprised at local disparities. For instance, the offices of Reverse Focus are located in Shasta County- situated 2 hours south of the Oregon border. The current FHA loan limit for Shasta county is $314,827- a price few homes fall below. Yet just a short 20-minute drive south in Tehama county (where average home sale prices are considerably less) the loan limit is strangely the same- a scenario likely to be replayed throughout the markets of many HECM professionals.
All which brings us to the question of what if Congress removes the HECM program’s national limit? It would be expected that higher-valued homeowners on both coasts would stand to benefit the most under FHA’s high-cost areas cap under which we’ve functioned since the passage of the Housing & Economic Recovery Act (HERA) of 2008. It would also open a significant opportunity for the creation of private/proprietary reverse mortgages for those with homes that exceed the reduced county limits and fall below today’s cap of $726, 525.
While no PLF (principal limit factor) cuts have been announced, the repeal of the HECM’s national lending limit would cut much deeper for higher-valued homes in lower-cost MSAs.
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The United States is in the mortgage business and in a big way. I have had to repeatedly remind myself that Uncle Sam’s reach in mortgage lending goes far beyond Home Equity Conversion Mortgages. At times many reverse mortgage professionals may lament our industry’s near total dependence on the federal government when in reality the majority of the housing market is regulated and ultimately backed by the taxpayer. The HECM is no exception.
This point should not be overlooked when considering the recent news that President Trump issued a memoranda instructing the Department of Housing and Urban Development to report back on the financial viability of the HECM program. A proposition that has caused considerable concern. It’s not a shocking development being mindful the program has generated significant claims since being moved to FHA’s Mutual Mortgage Insurance fund in 2009. Subsequently, FHA officials have wrestled with just how to stop the continuous stream of…
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President Trump has directed HUD to examine the ‘viability’ of the Home Equity Conversion Mortgage and to take other steps to strengthen FHA and the housing GSE’s Fannie Mae & Freddie Mac…
How quickly are HECM properties sold or called due and payable when the last borrower has died or moved out? More importantly, how many properties with a HECM are sitting on the books for years while the borrower’s heirs or unauthorized tenants remain in the house; in many cases for years?
It’s not often during my show prep that I strike gold, but this week was the exception finding an intriguing and unsettling article by Mike Branson. It details where a significant portion of our HECM losses may be coming from. Mike is the CEO and owner of All Reverse Mortgage. He has over 40 years experience in mortgage banking and also has served as an expert witness for the FBI in mortgage fraud cases. That particular experience plus numerous questions he has fielded has raised some very serious concerns which we will address here today. A very timely topic since the HECM may be facing additional changes this year.
[Download full report] [View 1-minute video summary] [Full Actuarial Review]
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.
