In November, the Federal Housing Administration issued its annual report to Congress on the health of its flagship insurance fund, and the results were not great for the reverse mortgage program.
For the third consecutive year, the report highlighted the HECM’s drain on the fund, this time to the tune of nearly $14 billion.
The report has renewed calls from policy analysts and industry execs – including former FHA Commissioner Carole Gallante and Housing and Urban Development Secretary Ben Carson, who have been vocal about this idea in the past – to remove the HECM program from the FHA’s Mutual Mortgage Insurance Fund.
HousingWire reached out to researchers Laurie Goodman and Edward Golding at the Urban Institute – who have written about the subject – to talk about why separating the two portfolios makes sense.
Goodman and Golding highlighted three main reasons that support the removal of the HECM portfolio from the fund.
No. 1: Reverse mortgages are volatile and need separate modeling instruments.
The HECM program is volatile, with drastic swings in capital ratio that make its performance hard to predict, Golding and Goodman pointed out.
In an article on the topic, the two noted that the capital ratio of the forward fund has shown predictable year-to-year growth of 0.5 to 1% since the Great Recession. Conversely, the HECM fund has varied by 8 to 14%.
The researchers said the program’s volatility stems from two issues that make it hard to model: the lack of data available after significant program changes were put into place, and the assumption-driven nature of the program, which includes the impact of home price appreciation and interest rates.
“The HECM program is very volatile, as even small changes in interest rates or in modeling assumptions can create big swings in the economic net worth of this program,” Goodman said, also noting that “there have been a number of HECM program changes which will affect the profitability of the fund going forward which are not reflected in the estimates.”
Golding said that estimates for the forward program are fairly stable and move in predictable ways based on significant historical data.
But estimates for the reverse program, he said, are unstable and not intuitive.
“For example, the economic net worth of the reverse program was positive $0.8 billion in 2015 and three years later was negative $13.6 billion, even though house prices increased by over 20% during that period,” Golding said, adding that the lack of historical data and the implementation of substantial program changes complicate matters even more.
“Put bluntly, no one knows how this program will perform and any estimate of economic net worth is little more than a guess,” Golding said.
The researchers said, though, that current modeling assumptions for the HECM are conservative and are likely exaggerating the its negative net worth.
No. 2: The FHA’s forward and reverse programs are too different to be lumped together.
The researchers asserted the HECM’s importance as a social policy that helps seniors age in place, and said that lumping its portfolio in with the FHA’s forward book would cloud decisionmaking for both programs.
“These are very different products, with different missions,” Goodman said. “The forward program contains 94.3% of the insurance in force. It does not make sense to make decisions for this program because of the condition of the HECM program, a program which is very difficult to model.”
No. 3: HECMs may be keeping forward mortgage premiums high.
Golding pointed out that the HECM’s current drain is likely impacting the FHA’s forward mortgage program, as the fund is required by statute to keep a 2% capital reserve.
“As it now stands, having the HECMs in the MMI Fund most likely has resulted in higher forward mortgage insurance premiums increasing the cost of homeownership,” Golding said. “It also allows critics of the forward program to exaggerate the risk to the taxpayers from the forward program. That program is doing quite well.”
The solution? Goodman and Golding say putting the HECM portfolio back in the FHA’s General Insurance/Special Risk Insurance Fund – where it resided upon its inception in 1988 until it was removed following 2009’s FHA Modernization Act – makes more sense.
“Fundamental reform of the reverse program may be necessary,” Golding said, “but placing it back in the GI Fund would be a good first step.”