The Federal Housing Administration’s (FHA) Mutual Mortgage Insurance (MMI) Fund grew by $3.8 billion during the past 12 months and now stands at 2.32%, up from 2.07% last year, according to the U.S. Department of Housing and Urban Development’s (HUD) annual report to Congress.
It was the fourth consecutive year that the fund grew and the second consecutive year that the FHA’s reserve ratio exceeded the congressionally required 2% threshold.
Driving the growth was a significant increase in the economic net worth of the FHA’s forward mortgage portfolio, which grew by $18.3 billion to reach an overall MMI Fund net worth of $27.6 billion.
However, the report shows that there is continued instability in FHA’s Home Equity Conversion Mortgage (HECM) program. The value of the FHA’s HECM portfolio fell $14.5 billion this year, due mainly, the FHA says, to changes in HECM modeling assumptions. For example, the HECM model was updated to include better estimates of the expenses and sales prices of defaulted HECM loans.
As the report shows, the HECM portfolio’s value has fluctuated wildly: In 2012, it had a net worth of -$2.8 billion; in 2013, it grew to $6.5 billion; in 2014, it fell back to -$1.2 billion; in 2015, it increased to $6.8 billion; and this year it fell back to -$7.7 billion.
Meanwhile, FHA’s forward mortgage portfolio has grown steadily, rising from a net worth of -$13.5 billion in 2012 to -$7.9 billion in 2013 to $5.9 billion in 2014 to $17 billion in 2015 to $35.3 billion this year.
“FHA has come a long way since our housing crisis,” says Ed Golding, principal deputy assistant secretary for housing, in a statement. “With evidence that FHA’s fundamentals are strong and improving, there is no doubt that FHA is making steady progress accumulating capital and, at the same time, improving access to credit for working families.”
David H. Stevens, president and CEO of the Mortgage Bankers Association, says although the “FHA and its leadership should be commended for the steps they have taken to improve the value of the FHA MMI fund for single family mortgages since the economic crisis,” the MBA is concerned about “the continued volatility in the HECM book of business, which this year turned negative, dragging down the overall value of the MMIF.”
“Given the importance of FHA to low and moderate income and first time homebuyers, the next administration may want to look at accounting for the two programs individually in order to isolate the critically important forward book from the wild swings of the HECM fund,” Stevens says.
Stevens adds that should FHA decide to move forward with a reduction in fees, it should do so cautiously, because “today’s report again shows the vulnerability to the reserve fund posed by the volatility in the HECM book.”
“Given the HECM volatility and recent concerns about liquidity in the Ginnie Mae market, these discussions should occur with an eye toward long term stability for the FHA program,” he adds. “We look forward to working with FHA to evaluate options that balance the need to ensure affordability for FHA borrowers, maintain actuarial soundness, and preserve stability in the Ginnie Mae mortgage backed security and mortgage servicing rights markets.”
Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, points out that FHA has made numerous changes to its HECM program over the years – and it is these changes that have led to the fluctuations in volume.
“The overall positive fiscal year 2016 actuarial report shows the MMI fund continuing on its upward trajectory to protect itself and taxpayers, from volatility in the marketplace,” Bell says. “However, with new modeling and calculations of FHA’s reverse mortgage portfolio, the actuaries show a decline in the HECM capital ratio from 6.4 percent in fiscal year 2015 to negative 6.9 percent in fiscal year 2016, mainly attributable to losses on loans endorsed prior to substantial program changes that were implemented in 2013, 2014 and 2015. The policies, which were introduced to make HECM loans more sustainable for borrowers and to mitigate risks to the MMI Fund, include limits on upfront draws, changes to the structure of mandatory insurance premiums, and new financial underwriting requirements of borrowers.
“While it is still too early to see the results of the changes, modeling and analysis completed earlier this year by Dr. Stephanie Moulton from the Ohio State University and others, shows that the combined impact of the new policies should cut the risk of HECM defaults in half,” Bell adds.
Of course, keeping up with all the changes to the HECM program has been lots of fun for the developers of reverse mortgage loan origination software.
“As an industry, we are reaching out to HUD to better understand how their accounting methodology works and what has changed,” Jeffrey M. Birdsell, CMB, vice president of professional services for ReverseVision, tells MortgageOrb. “ReverseVision has implemented all the changes HUD has made to the structure of the HECM product, including support for financial assessment and non-borrowing spouses, all of which support the preservation of the MMI fund. Eventually, the MMI fund will reflect more loans that were originated under the revised guidelines, as loans made under the older guidelines are paid off. We fully expect the HECM impact on the MMI fund to become more and more positive over time.”
The full report is here.