The HECM and the Financial Health of the FHA
Just as the economy as a whole has undergone significant stresses over the last several years, so also has the Federal Housing Administration (FHA). Because of dropping home values and an increase in defaults, the FHA’s Mutual Mortgage Insurance (MMI) Fund faced financial losses. The reverse mortgage, or Home Equity Conversion Mortgage (HECM) has its own portfolio within the MMI Fund.
As the severity of the financial issues became apparent, changes were made across all of FHA’s programs. In October 2009 the HECM program saw a 10% cut in principal limits, and in October 2010 the program saw additional principal limit cuts, and there was an increase in the insurance premiums charged to borrowers. During this time the MMI Fund was forced to dip into capital reserves. In 2010 about $1.74 billion was transferred from reserves, and in 2011 another $535 million.
It appears that these measures have been successful in turning things around. In November 2011 the annual actuarial review of the MMI Fund was released, and it states that that the HECM portion of the fund has been restored to the point where it will no longer need general fund support. Further, it projects that the economic value of the HECMS in the fund will increase from $1.36 billion in FY 2011 to $10.03 billion in FY 2018.
Carol Galante, acting FHA commissioner, has said that the introduction of the HECM Saver program in October 2010 has also been important in positively impacting FHA’s finances. The HECM Saver allows borrowers to almost eliminate the up-front lump sum portion of the mortgage insurance in exchange for a reduced monetary eligibility. This program brought in many borrowers who might otherwise have chosen not to participate, plus it reduced the stress on the mortgage insurance.
But the work of protecting the future of the HECM program is not yet complete. Bank of America, Wells Fargo, and Financial Freedom all left the reverse mortgage marketplace in 2010 and 2011. Together they accounted for about 45% of all reverse mortgages originated in the United States. The problem for these lenders was the rising number of defaults. One would think that because a HECM has no monthly payments there would be no defaults. However, loss of home values, increase in medical costs, loss of jobs, etc. all contributed to borrowers in many cases being unable to keep up with property taxes and homeowner’s insurance.
Lenders were faced with either foreclosing on seniors (a public relations nightmare), paying the required taxes and insurance themselves (taking financial losses), or leaving the HECMs to others. What the Big 3 lenders wanted to do was alter the guidelines for borrower qualification so that those who were most likely to default in the future would not get a HECM in the first place, but they did not have that authority. The FHA and other lenders were beginning to talk about the eligibility issues, but the Big 3 did not want to wait for some unknown possible future change, and pulled out.
The year 2012 will be the year that the FHA will finally come out with its official guidelines for some level of increased scrutiny of HECM borrowers, who up until now have had practically no financial underwriting at all. For the most part, if the property and equity fit, and they were at least 62, it went through. This will be changing, and the new underwriting will be the last big piece of the picture that will put the HECM on firm financial ground for the future.