[Updated] 2020 MMI Report: Improved FHA Reverse Mortgage Portfolio, Though Still Negative

The reverse mortgage portion of the Federal Housing Administration’s Mutual Mortgage Insurance Fund (MMIF) continues to stand at a negative capital ratio on the overall government-backed portfolio, according to an annual actuarial review of the fund’s finances released Friday morning. However, its negative value over the past year has been almost entirely diminished, sitting at approximately -$500 million compared with the -$5.92 billion figure recorded in 2019.

This represents a positive shift in the health of the Home Equity Conversion Mortgage (HECM) book of business, marking a second consecutive annual improvement over the issues that have been present in it over the last few years, though FHA continues to see a need for action to be taken to create further stability in the HECM book, according to the FHA Annual Report submitted this year to Congress.

The standalone MMI Fund Capital Ratio for HECMs increased by 8.44 percentage points, from negative 9.22 percent in FY 2019 to negative 0.78 percent in FY 2020. 

At the end of fiscal 2020, the Home Equity Conversion Mortgage (HECM) cash flow net present value, a measure reported to Congress by the Department of Housing and Urban Development (HUD) and endorsed by actuarial firm Pinnacle Actuarial Resources, was estimated to be -$2.09 billion. That’s an increase from -$5.92 billion estimated in fiscal year 2019.

In contrast, the fiscal condition of FHA’s forward portfolio is marked by an economic net worth of $77.75 billion and a capital ratio of 6.31%, an improvement over the 5.44% recorded in fiscal year 2019.

The FHA Annual Report notes the improvement of the HECM portfolio, but describes that it still remains a “drag” on the MMI Fund overall.

“While the financial performance of the HECM portfolio shows improvement, it remains negative, meaning that the claims paying capacity for the program is insufficient to cover projected losses,” the report reads. “It should also be noted that the HECM program is historically more volatile than the forward loan portfolio, and projections of HECM’s financial performance are more sensitive to changes in home price appreciation (HPA) and interest rates.”

FHA recommendations to Congress

While the government has taken several actions to improve the financial standing of the HECM book of business, more work is required to further stabilize the program according to the report.

“Over the last 3 years, FHA has taken several actions to improve the HECM portfolio’s outlook; however, it continues to be a financial drag on the forward portfolio,” the report reads. “The forward portfolio’s positive performance in effect ‘subsidizes’ the HECM book of loans. FHA will continue to take steps to stabilize the HECM program for borrowers and taxpayers.”

The Annual Report also directly calls out the loan limit structure of the HECM program as a factor contributing to the HECM portfolio’s drag on the larger fund.

“Given the HECM program’s historic volatility and contributions to outsized losses to the MMI Fund, the HECM program poses a greater risk based on loan limits than the forward program and has the potential to negatively impact FHA’s ability to meet its statutory goals for its Single Family programs,” the report reads. “FHA questions whether the mission of FHA is being served by the current HECM loan limits.”

The report also recommends that Congress establish a separate capital reserve for the HECM program in order to minimize losses to the forward book of business.

“In order to give the most accurate information and provide for more targeted management of the financial health of the Fund based on program type, FHA recommends that a separate HECM capital ratio be established and action be taken to reduce the potential for negative impact on FHA’s forward mortgage mission-driven lending as a result of losses sustained in the HECM portfolio,” the report reads.

FHA Commissioner on HECM program

In a media briefing with reporters on the Annual Report, FHA Commissioner Dana Wade expressed recognition for the improvement of the HECM program, but still feels there is work to be done in terms of mitigating the effect of the reverse book of business on the forward portfolio.

Dana Wade official HUD portrait.
FHA Commissioner Dana Wade

“I’m sure you saw in the report that the standalone capital position of our reverse mortgage portfolio has improved,” Wade told RMD on the call. “It was -9.22% last year, and now it’s -0.78%, but it’s still negative. And I think the important thing to note with HECM is that this modeling is despite what is a very positive trend that we’ve seen, and have projected for house price appreciation. So, that’s certainly of concern to us.”

The HECM program will continue to require FHA to “vigilantly monitor” its status, Wade said, which is one of the chief reasons behind one of the agency’s key recommendations to the U.S. House of Representatives and the Senate, she said.

“That’s one of the reasons why we recommended pulling out the reverse mortgage program from the Mutual Mortgage Insurance Fund, so that it could be a standalone fund [which] would provide additional transparency in terms of what is needed to stabilize the fund, the capitalization required to support the program, etc.,” she said. “I think that’s the right thing to do, and I really hope that’s something that Congress considers as it looks at comprehensive housing finance reform.”

In terms of the likelihood of congressional action on this matter, Wade was hopeful that the legislative body would take action, considering that there are very few ways in which the reforms proposed by FHA can be interpreted from a partisan perspective, she said.

“In terms of Congress working on comprehensive reform, I have hope,” she said. “I know this is a discussion that has continued for a long time, I think too long. I think it is time for Congress to act. I think there were some great reforms that we’ve proposed as part of our housing finance reform report, including looking at a standalone HECM capital ratio, that really should be considered on a bipartisan basis. There’s nothing political or partisan about it. It’s really all about fiscal stewardship.”

Wade was also asked on the call by a CNN reporter about the impending transition to the administration of President-elect Joe Biden, and acknowledged that the role of any administration appointee is temporary.

“Obviously, I can’t speculate on what’s going to happen in a couple weeks or a couple months at this point,” she said. “I will say that as an appointee, when you work in any administration, you know that you’re term-limited, and that you have a finite amount of time to be in this role. And I feel very privileged to be here, to be running FHA during this critical time. All administrations come to an end. When that happens, I think the goal of all of us is to ensure that FHA is in a sustainable position, that we have good continuity, and that we run a strong program. And that’s all I can say, at this point.”

Industry response

While undoubtedly difficult to adjust to, actions taken by HUD over the past few years have continued to illustrate that new policies instituted by the Department have been effective, according to Steve Irwin, president of the National Reverse Mortgage Lenders Association (NRMLA).

“The Annual Report to Congress on the health of the Single Family MMI fund shows how effective HUD’s HECM policies have been,” Irwin told RMD in an email. “The financial assessment, initial disbursement limitations and collateral risk assessment appear to be bolstering the performance of the HECM portfolio.”

Making changes on the servicing side would help the HECM portfolio to build on its recent success in mitigating losses to the fund, Irwin added.

“We are hopeful that by transitioning the servicing of the assigned loans to a vendor who has cutting edge technology, stellar customer service and deep subject matter expertise, the HECMs will continue on their trajectory to enhanced performance within the MMI Fund,” he said.

Find the FHA Annual Report on the MMI Fund at HUD.

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