In 2022, the reverse mortgage portion of the Federal Housing Administration (FHA) Mutual Mortgage Insurance Fund (MMIF) reached a positive capital ratio for only the second time since 2015, according to an annual actuarial review of the fund’s finances and the FHA’s Annual Report to Congress, which were released Tuesday. The value of the MMIF is approximately $15.1 billion for 2022 — a sharp annual increase compared to $3.8 billion valuation in 2021.

The uptick in value signals a positive shift in the health of the Home Equity Conversion Mortgage (HECM) book, marking a fourth consecutive annual improvement, according to the FHA Annual Report and accompanying actuarial report.

“I’m so proud of FHA’s work to make homeownership possible for our nation’s underserved households and communities,” Federal Housing Administration (FHA) Commissioner Julia Gordon said in a statement. “Behind the bottom-line numbers are some two million individuals and families who were able to achieve homeownership or stay in their homes through hard times, thanks to assistance from FHA.”

HPA drives HECM growth

The positive HECM performance is largely attributed to the recent levels of home price appreciation (HPA) in the U.S. housing market. Still, HPA levels have slowed considerably in 2022.

“The financial performance of the HECM portfolio has improved in each of the last four years and is now positive for the second time since FY 2015,” the FHA Annual Report states.

However, the HPA performance over the past couple of years has been historic in nature, according to the report. As such, similar increases cannot be forecasted or expected in the near future.

“[A]verage house prices have increased by 73% over the last six years, with the most significant appreciation occurring over the last two years,” the report states. “As HPA cools due to macro-economic factors, the MMI Capital Ratio is not likely to grow in future years at anything close to the same rate, and in fact may decline.”

The standalone MMI Fund Capital Ratio for HECMs also grew by 16.69 percentage points, climbing from 6.08% in FY 2021 to 22.77% in FY 2022. The increase was partially due to a permanent allocation of $1.7 billion in appropriated funds to the HECM portfolio, which was requested by FHA from the U.S. Treasury Department in fiscal year 2013. This was done in an effort to address past losses.

The HECM cash flow net present value in 2022, which is a measure reported to Congress by the Department of Housing and Urban Development (HUD), was estimated to be $6.17 billion. That signals another sizable increase, up from $390 million in fiscal year 2021.

The FHA’s 2022 forward portfolio, on the other hand, was marked by a capital ratio of 10.47%, up from 7.99% in fiscal year 2021. MMI forward capital for 2022 was at $126.6 billion.

The report also notes the size of the HECM portfolio in comparison to the forward book.

“It is important to note that HECMs comprise only about 5% of the MMI portfolio and are significantly more sensitive to relatively small changes in capital position,” the report states. “For example, the same $11.3 billion growth in MMI Capital that resulted in a 16.7 percentage point increase in the HECM stand-alone capital ratio would have increased the stand-alone capital ratio for the forward portfolio by only 0.9 percentage point.”

HECM outlook and HPA impact

There are no specific HECM program policy recommendations for Congress in the report. When asked about what the priorities and goals of the HECM program will be for the next year, including any potential program changes, Gordon noted that ongoing dialogue with stakeholders across the forward and reverse mortgage industries is key to formulating any new policy.

“I would say for both the forward and the reverse portfolios, we are always looking for opportunities to change policies in a way that we think makes the program[s] look better,” Gordon told RMD during Tuesday’s call. “So while I don’t have any specifics for you on anything that we’re planning on the HECM side, I do know that we’re always looking for opportunities and listening to hear what our stakeholders are talking about.”

The FHA expectations were reasonably in-line with what the final report illustrates about HPA having an impact on the health of the HECM portfolio, according to Mia Pittman, deputy assistant secretary for the Office of Risk Management at HUD.

“Certainly, we were aware of the fact that house price appreciation was continuing to be quite strong in the first half of the year,” Pittman said. “And so from that perspective, we were certainly not surprised that it had an outsized impact on the HECM portfolio. But again, until we get to the end of the year and we see what that actually means in terms of applying those assumptions to the underlying portfolio economics, it’s difficult to say that it was anything different from expectation.”

When asked later about whether or not HUD expects the HECM program to remain in positive territory as HPA cools nationwide, a HUD spokesperson noted that future moves are inevitably tied to future rates of HPA.

“The current capital ratio for the HECM program is due largely to the unprecedented increases in home values seen in recent years,” a HUD spokesperson told RMD. “As home prices moderate in the coming years, so too will the capital ratio for the HECM program.”

Industry response

When reached, National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin related encouragement about the strong performance of the HECM book of business and looks forward to future collaborative opportunities with HUD and FHA, also crediting the strong performance to factors beyond HPA.

“We see from the issuance of today’s Annual Report to Congress regarding the status of the MMI Fund that the HECM program continues its strong performance,” Irwin told RMD. “While it’s certain that the macroeconomic conditions have been favorable to the HECM’s performance, we are also confident that the implementation of programmatic reforms is also continuing to contribute to this strong performance.”

The results also indicate that further improvements to the HECM program can be made, he said.

“NRMLA will be looking at ways and offering proposals that will expand the accessibility of this program. There may be opportunities to enhance loss mitigation options and the utility to underserved communities, and the accessibility in regions that may not be fully served as well. We look forward to continuing our dialogue with HUD on these enhancements.”

Read FHA’s Annual Report to Congress for the fiscal year 2022 at HUD.

Editor’s note: This story has been updated to correct the estimated HECM NPV to FHA’s figure, and to include a statement on the results from NRMLA President Steve Irwin.