The Federal Housing Administration released its 2018 Report to Congress on Thursday, revealing that the reverse mortgage program continues to be a drain on its flagship Mutual Mortgage Insurance Fund.
The actuarial report showed the fund to be in good health with a positive economic net worth $34.86 billion, up $8 billion from last year.
It also posted a capital reserve ratio of 2.76%, up from last year’s 2.18%, and over the 2% statutory mandate for the fourth consecutive year.
But the HECM’s picture wasn’t quite as rosy.
FHA’s report revealed that the reverse mortgage program had a negative capital ratio of 18.83% and a negative economic net worth of $13.63 billion in the last fiscal year.
The report also noted that HECM endorsements declined 12.6% since last year, totaling just 48,327 loans in fiscal year 2018.
The portfolio’s total capital resources were $2.11 billion, which FHA said was offset by a negative $15.75 billion in cash flow net present value.
Despite the drain, the agency said it will not be issuing further reverse mortgage program changes just yet, keeping current principal limit factors and mortgage insurance premiums intact.
FHA Commissioner Brian Montgomery said the HECM program is still experiencing the impact of policy changes made last year, and that the agency is optimistic it will continue to improve over time.
“Revisions to the HECM principal limit factor that we implemented in October 2017 have shown some progress in improving the financial performance of the 2018 HECM book of business, and we expect that we will see additional improvements with our 2019 book of business,” Montgomery said on a call with reporters Thursday.
“We fully recognize the burden we’ve placed on the industry and our network of housing counselors,” he added. “Every year we more or less rewrite the script. So one of our guiding principles this year was we want to protect the PLF, we want to stave off any additional premium increases.”
While current PLFs will stick, Montgomery alluded to other potential changes down the road, including rules to address some of the program’s back-end servicing issues.
“Changes will be made on the back end as well, will be announced through a mortgagee letter,” he said. “So, certainly we still have work to do, but we are continuing to monitor the performance of the book and the impact of those changes over the last 12-14 months.”
Montgomery also said the agency is looking to address problems with non-borrowing spouses, which he said has attracted the attention of Capitol Hill.
“In one of our many hours of triage that we spent looking at our forward and reverse books, the one thing we feel strongly – and we will have announcement on this soon – is we need a proper inventory of the occupants in those homes for HECMs [originated in] 2014 and earlier,” Montgomery said.
“So, we’ve drafted a letter, we’re talking with servicers, were talking with folks in the industry who have been helpful,” he added. “We want to do our level best to get a proper accounting of who is living in the home.”
Montgomery also discussed the impact of FHA’s second appraisal rule on select HECM loans. He noted that so far, only 22% of HECMs have required a second look, calling this figure “a little less than we originally estimated.”
Department of Housing and Urban Development Secretary Ben Carson said the HECM’s poor performance is among some of the troubling trends highlighted in the report that the agency will be monitoring.
“There are some risk factors that we need to play close attention to, specifically home equity conversion mortgages…continue to be a significant drain on FHA’s insurance fund,” Carson said on the press call. “Younger borrowers with forward mortgages continue to subsidize senior borrowers in our HECM program to an unsustainable degree.”
Carson said the agency has already taken steps to improve problems within the HECM program, including tax and insurance defaults and issues with non-borrowing spouses.
“Clearly, a lot of things have already occurred. It’s water under the bridge as far as HECM is concerned,” Carson said. “The changes that have been made in terms of the principal limit factors and in terms of the amount of premiums that are paid up front versus the amount of annual premium that’s paid. We’re just now, really over the last six months, seeing the positive effects of those things. We will see the full effect in the coming years, and there are multiple other things that are being looked at.”
Montgomery said that Financial Assessment and other program changes instituted in 2014 appear to be having their intended effects, as the number of tax and insurance defaults on HECM loans has decreased in recent years.
“We are committed to maintaining a viable HECM program so that seniors can continue to age in place, but we cannot continue to see future HECM books be subsidized by borrowers using our forward mortgage programs – it’s not beneficial to anyone, including taxpayers,” he said.
“The good news is we’ll have the benefit of a full year of impact of the changes from last year, which directionally are positive,” Montgomery said. “So we again remain optimistic that the quality of the book will continue to improve.”
