The reverse mortgage portion of the Federal Housing Administration’s Mutual Mortgage Insurance Fund continues to drag on the overall government-backed portfolio, according to an annual actuarial review of the fund’s finances released Thursday morning.
At the end of fiscal 2018, the Home Equity Conversion Mortgage cash flow net present value, a measure used by actuarial firm Pinnacle Actuarial Resources, was estimated to be negative $13.63 billion—a slight increase from a negative value of $14.5 billion estimated in fiscal year 2017. The HECM portfolio ended this year with a negative 18.3% capital ratio, according to the findings.
In contrast, the fiscal condition of FHA’s forward portfolio is marked by an economic net worth of $46.8 billion and a capital ratio of 3.93%, an improvement over fiscal year 2017.
In light of the negative economic value relative to the positive performance of the forward portfolio, the HECM program continues to be a risk for FHA that the agency is monitoring, Department of Housing and Urban Development Secretary Ben Carson said during a call with reporters.
“The financial health of FHA’s single family insurance fund is sound,” Carson said. “There are some risk factors. Specifically the reverse mortgage [program] continues to be a significant drain on FHA’s insurance fund. Forward borrowers continue to subsidize reverse borrowers to an unsustainable degree.”
FHA Commissioner Brian Montgomery echoed the risks presented by the HECM portfolio, noting that the agency is committed to monitoring and improving the program, and that recent program changes are beginning to take effect.
“We are committed to maintaining a viable HECM program, but we cannot continue to see future HECM books subsidized by forward volume,” said Montgomery during a call with reporters. “We have taken steps to improve the performance. Preliminary indicators are that these changes will have positive effects.”
Recent measures taken to modify the Reverse Mortgage Program — including last year’s lower Principal Limit Factors and this year’s new appraisal requirements — have been seen as positive in FHA’s efforts to improve the economic health of the fund, HUD officials said; however, those changes address the most recent books of business rather than shortfalls stemming from loans originated prior to 2015. Leadership is working to protect principal limit factors and avoid additional mortgage insurance premiums, with an optimistic outlook, Montgomery said.
“We recognize the burden this places on the industry and the network on housing counselors,” Montgomery said of the most recent program changes. “We wanted to stave off premium increases and protect [principal limit factors]. We were able to get to a place where we did not have to have further reduction for PLFs. We will continue to monitor the quality of the book. We remain optimistic that the quality will improve.”
The final calculation includes several factors that both helped and hurt the overall value of the HECM portfolio. The team from the Bloomington, Ill.-based Pinnacle noted that the loans from fiscal years 2009 and 2017 actually outperformed their projections by about $1.3 billion. In addition, Pinnacle includes an economic outlook calculation in the overall net cash flow value; because Treasury and mortgage rates were lower than projected, the economic calculation boosted the cash flow value by $1.1 billion.
But lower origination volume in fiscal year 2018 docked the cash flow estimate by about $1.3 billion, Pinnacle wrote, and a gloomier outlook for loan termination and cash draws prompted the firm to lower its predictive model for the portfolio by around $1 billion.
Written by Elizabeth Ecker
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