Policymakers have long struggled with how to fix the Federal Housing Administration’s reverse mortgage program to prevent it from draining the agency’s mortgage insurance fund.
Over the years, numerous adjustments have been made, including a massive set of new regulation issued in 2017 that has drastically impacted the product and the lenders who work with it.
Yet, the drain persists, and FHA hasn’t been able to find a meaningful way to keep the program viable and profitable, despite its repeated recognition that it’s an important offering for the nation’s rapidly growing senior population.
But researchers are the Urban Institute have an idea: Fix the program’s servicing problems, which they call “one of the biggest drivers of losses in the HECM program.”
In essence, stop the practice of transferring servicing rights and allow the loans to remain with their current servicer.
While HECM loan servicing is a bit complicated, here’s a simplified rundown to better explain the problem and why FHA’s servicing methods are costing it money:
When the value of a reverse mortgage loan reaches 98% of the initial home value, the servicer must remove the loan from a Ginnie Mae securities pool and the lender then has the option of assigning it to the Department of Housing and Urban Development if it qualifies, meaning it is not delinquent or inactive.
About 40% of HECM loans are assigned to HUD at this juncture, at which time the loan is transferred to FHA’s servicer. And herein lays the problem, according to researchers Laurie Goodman and Edward Golding.
“Servicing transfers are inherently disruptive. Borrowers are often confused when they receive a note that their servicer has changed,” the researchers point out. “There’s also no standardization in servicing data, and errors can occur in the transfer process.”
Beyond that, the FHA loses much more on these loans than is necessary, the researchers write, asserting that the loss rate is roughly 42% for these assigned loans. By comparison, loans that remain with the original servicer have a loss rate of just 12%.
“When servicers keep the loans that cannot be assigned, the losses are much lower than those incurred on assigned loans because FHA policies do not maximize the value of the properties, and servicers’ incentives, in combination with their specialized knowledge, reduces losses,” the researchers write.
Specifically, the FHA does not foreclose on properties with tax and insurance defaults, and it’s likely they don’t monitor vacant properties closely enough.
Servicers are better at monitoring the properties, the researchers write, which is crucial because the longer the house lays vacant and decaying, the more money the servicer can lose.
The researchers write that part of the problem is that HUD-contracted servicers are not held to strong performance measures and do not face penalties for poor performance.
“If HUD could continue to accept assignment of HECM loans but allow servicing to be performed by the current servicers, it could improve the health of the [Mutual Mortgage Insurance Fund] without impacting the program’s scope,” they write. “The loans would sit on the FHA’s balance sheet. Servicer performance could be monitored by comparing the loss severity of the loans they assign with those they don’t assign.”
The researchers also suggest that another possible alternative could be to develop a securitization program to repool loans when they reach the 98% threshold and must be removed from Ginnie Mae’s pools.
This new securitization vehicle would lower the cost of funding for the servicer and provide incentive not to assign loans to HUD, but the researchers write that more study is needed to assess the true impact of such a move.
In all, the researchers say that the reverse mortgage program should be more widely used considering the levels of housing wealth available to seniors, but that FHA’s tendency to curb loses by enacting changes that narrow eligibility have hampered its growth.
“The evidence clearly indicates that the FHA is suffering greater losses than necessary by transferring servicing when loans reach 98% of the initial home value. If the FHA were to allow existing servicers to retain the servicing for the rest of the life of the loan, it would stem these unnecessary losses,” the researchers conclude. “This is critical to the future viability of this valuable program for seniors.”