The Home Equity Conversion Mortgage (HECM) program continues to lose money for the Federal Housing Administration (FHA), and likely needs to be removed from the Mutual Mortgage Insurance Fund (MMIF) in order to stop forward mortgage borrowers from subsidizing their reverse mortgage counterparts.

This is according to newly-installed FHA Commissioner Dana Wade, speaking with a panel at a virtual luncheon hosted by Women in Housing Finance last week. Commissioner Wade also discussed the belief that HECM is an important program for senior borrowers, and that the government has aimed to make the program more flexible so that seniors can better endure the effects of the COVID-19 coronavirus pandemic.

Added flexibility for seniors during pandemic

“HECM. Oh, boy,” Commissioner Wade began, before offering her perspective.

“Okay, well, that is the Home Equity Conversion Mortgage program, the reverse mortgage program for FHA. It’s an important program for borrowers,” she said. “I think right now, we’re focused on – and this is an elderly population of borrowers – ensuring that we’re giving them the tools to be able to weather COVID.”

Some of those tools come in the form of additional “flexibilities” that the government has introduced during the pandemic. The Commissioner could be referring to actions HUD has taken including the relaxation of appraisal requirements which currently allow for exterior-only or desktop-only appraisals, a moratorium on foreclosures and evictions, as well as allowing lenders to submit HECM case binders electronically.

“We’ve put in place a lot of flexibilities for HECM to try to make their lives easier,” Commissioner Wade said.

HECM and the MMIF, HUD comment

The HECM program has presented problems for FHA’s overall financial health, according to the Commissioner, and this is an issue that should likely be addressed so that traditional mortgage borrowers do not continue to subsidize reverse mortgage borrowers, Wade said.

“I think, from the perspective of FHA’s financial sustainability, HECM has had some issues,” Commissioner Wade explained. “It continues to be a draw on the capital reserve. That’s due to a lot of factors: it’s a reverse amortization loan, very much the […] appraised value of the actual property is important and comes into play here, as well as the interest rate environment.”

The complexity of the HECM program is also something that tends to work against it, especially when coupled with losses that the MMIF has endured because of the HECM program, she says.

“[I]t’s a financially complicated program that’s lost money for FHA, which is why we’ve proposed reforms in [the] Housing Finance Reform report, including separating it out of the Mutual Mortgage Insurance Fund,” Wade said. “That fund really should be there for first-time, low-to-moderate income minority borrowers, FHA’s bread and butter. And unfortunately, it has had to subsidize the reverse mortgage borrowers.”

The Housing Finance Reform Plan the Commissioner is referring to was first announced in an executive memorandum by the president in March of 2019 and submitted to his office by the Department of the Treasury that September.

It made several proposals for the HECM program — such as the elimination of HECM-to-HECM refinancing, and the creation of geographically-based loan limit values similar in nature to those in the forward market — while also ending federal conservatorship of both the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”).

The report also details Treasury’s recommendation to remove the HECM program entirely from the MMIF, a move that Commissioner Wade supports, she said.

“I think taking [the HECM program] out of the fund, providing more transparency into what’s happening in the HECM or reverse mortgage space is going to be a great thing for potential borrowers, for the public, and for the industry,” she said.

After this story originally went to press, HUD provided an additional statement to Commissioner Wade’s comments.

“As part of its Housing Finance Reform plan, HUD proposed multiple measures to stabilize the financial performance of the HECM portfolio, including recommending that Congress should set a separate HECM capital reserve ratio and remove HECMs as obligations to the Mutual Mortgage Insurance Fund,” a HUD spokesperson told RMD. “HUD believe that separating the HECM portfolio from the Mutual Mortgage Insurance Fund would allow for more accurate representation of the financial performance of its HECM portfolio.”

Industry response

The position of HUD in relation to the possibility of removing the HECM program from the MMIF is well-known by the reverse mortgage industry’s trade association, according to Steve Irwin, president of the National Reverse Mortgage Lenders Association (NRMLA).

“NRMLA has been aware of HUD’s position on bifurcating the HECMs from the MMI fund since the publication of the Department’s Housing Finance Reform Plan in March of 2019, and we certainly appreciate Commissioner Wade’s concern about the HECM performance within the fund,” Irwin told RMD in an email.

There are still some remaining tasks that should be accomplished prior to conceptualizing such a change, Irwin said.

“I think that before there can be a thorough analysis of such a move, the Department should continue to work to improve the servicing performance of HECMs that have been assigned to HUD,” Irwin said. “Once the issues on the back end of the HECM lifecycle can be resolved, and the front-end changes that have been implemented over the past several years have been fully considered in the modeling of the program, we should see the fund restored to a positive net worth.”

Commissioner Wade was first nominated to the position of FHA Commissioner by President Donald Trump in February, and was confirmed by the Senate at the end of July. Wade succeeded current Deputy HUD Secretary Brian D. Montgomery as FHA Commissioner, and in her previous tenure as general assistant secretary for HUD’s Office of Housing, Wade spoke out in support of October 2017’s sweeping changes to the HECM program as necessary measures to protect taxpayers.

“The HECM program has been a substantial net economic drain on the MMI Fund, which is why we made these changes,” Wade said in November 2017.

Editor’s Note: This story has been updated to include a comment from HUD regarding the potential separation of the HECM program from the MMIF.