Reverse Mortgage Capital Ratio Turns Positive, But No Time for Complacency

For the first time since 2015, the Capital Ratio for the reverse, or Home Equity Conversion Mortgage (HECM), book of the Federal Housing Administration (FHA) has moved into positive territory

The HECM portfolio’s measure of financial health swung to a remarkable 6.08% for the fiscal year ending September 30, up from a negative 0.78% in FY2020, and a substantial move from lows touched just three years ago, when it sunk to negative 18.8% in 2018.

The HECM Capital Ratio is the proportion of FHA Capital in the Mutual Mortgage Insurance Fund (MMI Fund, or “the Fund”) to the Insurance-in-Force.  Its rise has come following changes to the program in 2017 and 2018 aimed at increasing its financial viability, and to be sure, sustained home price appreciation, which has an outsized impact on the calculation.

On November 15, FHA released its Annual Report to Congress on the Financial Status of the Fund, revealing that the overall Capital Ratio in Fiscal Year 2021 had improved to 8.03%, a new historic high.

As part of the actuarial report, FHA provides separate, stand-alone capital ratios for both the forward mortgage and reverse mortgage books to reflect the relative position of each portfolio and their effects on the Fund.  

The HECM program, which has been a drain on the financial health of the Fund in recent years, was a top priority for FHA when then-Secretary Ben Carson arrived in 2017. Months later, under the direction of acting FHA Commissioner Dana Wade, FHA made necessary revisions to both the HECM “initial” and “annual” Mortgage Insurance Premium (MIP) rates, and to the HECM Principal Limit Factors (PLFs). PLFs are percentage values used to calculate the total amount available to HECM borrowers.

As HUD stated at the time, the 2017 changes were made to “reduce the potential for future defaults when economic drivers—such as house price appreciation or interest rates—change.” With reverse mortgages, defaults most often occur when a loan becomes “due and payable” following a borrower’s death, and there is little or no equity left in the home. 

In 2018, after I was confirmed as FHA Commissioner, we established a specialized internal working group to examine risk factors that affect the severity of claims, including to what degree appraisals on the front end were inflated, a dynamic that we believed has had a deleterious effect on the HECM program.

After careful analysis and confirmation (and the discovery of a well-timed paper on the topic of appraisal bias in HECMs by HUD’s Policy Development & Research Office), we determined that inflated appraised values on HECM properties were more common than we initially thought. Beginning in October 2018, consequently, we put measures in place to correct for these biases, requiring a second appraisal if our review demonstrated that there may be an inflated value.  HECM lenders, who understood the need to get the HECM program on sounder financial footing, were supportive of the new appraisal policy.

While recognizing that the HECM stand-alone capital ratio is highly sensitive to HPA, even more so than the forward book, the changes made to the reverse program in 2017 and 2018, and changes made by previous Administrations, nevertheless have helped move a program that had been struggling to demonstrate sustainability in a positive direction and into the black.

That said, “the strong HPA experienced in recent years,” as stated in the Annual Report, explains the welcome and dramatic increase in the ratio from FY 2020 to FY 2021. It does not, however, provide a reason for complacency or assurance of future (positive) results.

Continued attention to the structure of the HECM program, ensuring it is not continuously subsidized by the premiums of low- to moderate-income and first-time homebuyers paying monthly premiums in the forward book, will be vital for the HECM program to continue to serve its mission, particularly to low- and moderate-income seniors looking to age in place, and to garner continued support from lawmakers.

The leadership of FHA under successive Administrations has been a prudent caretaker of the MMI Fund and made changes to the HECM program as needed. As such, we believe the current Administration will be equally vigilant in ensuring the financial viability of a program that helps a group vitally important to HUD’s core mission—seniors.

Written by Brian D. Montgomery, Keith Becker and Dror Oppenheimer

Brian Montgomery is currently the chairman of Gate House Strategies and the former HUD deputy secretary and FHA Commissioner. Montgomery also serves as a member of the board of a private mortgage insurer.

Keith Becker is the president of Gate House Strategies and former FHA chief risk officer and 26-year veteran of Freddie Mac where he served as single family chief credit officer.

Dror Oppenheimer is a founding partner of Gate House Strategies and a former Senior Advisor to the FHA Commissioner, and 31-year veteran of Fannie Mae where he served as Senior Vice President for Credit Default Operations. The opinions expressed are our own and do not necessarily reflect those of our employer or any client.

This column does not necessarily reflect the opinion of Reverse Mortgage Daily and its owners.

To contact the authors of this story:
Brian Montgomery, Keith Becker and Dror Oppenheimer at

To contact the editor responsible for this story:
Chris Clow at [email protected]

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