The estimated value of the Federal Housing Administration’s reverse mortgage program fell by $1.4 billion over the last year according to the latest actuarial review published by the Department of Housing and Urban Development.
“Our projections indicate that, as of the end of FY 2010, the HECM portion of the MMI fund will not have sufficient capital resources to meet its future liabilities and hence will require support from the overall fund,” said IBM Global Business Services, the company responsible for the audit.
In order to cover the net cost of the HECM FY 2009 book of business, FHA transferred $1.74 billion from the capital reserve account to the MMI Single Family program, bringing the capital ratio for the program from -4.3 percent to -0.98 percent. The new estimate is a drastic change from IBM’s previous report, which put the value of the FHA’s 2009 portfolio of reverse mortgages at $909 million and enough to cover future losses.
According to the IBM, the change is driven by three factors: discount rates, the house price forecast, and home maintenance risk. “This year’s review projected a slower house price recovery for the nation than last year’s review.”
Rather than use the same data provider − Global Insight data − for home price forecasts, IBM turned to Moody’s. Previous calculations used nationwide projections, while Moody’s data breaks it down to MSA levels and allowed IBM to zero into places like Florida, Texas, and California, where the HECM portfolio is concentrated
“The HECM portfolio is more concentrated in areas with higher forecasted house price decline and lower forecasted long term house price growth,” said IBM. “As a result, this year’s review estimated lower future recoveries at loan termination, which suppressed the estimated economic value of the overall HECM portfolio.”
According to Moody’s forecast, the annual national house price rate will fall by 1.3 percent during FY 2010 and begin to rebound in the second quarter of FY 2011. “The forecast suggests house price appreciation will rebound to the high four percent in FY 2014 and will return to around a long-run average of three percent,” said the report.
Once home values begin to rebound, so should the value of the HECM portfolio.
“We estimate the economic value of the HECM portfolio will subsequently increase over time with the addition of new books-of-business, the introduction of HECM Standard and Saver options in FY 2011, and improvements in forecasted economic conditions.”