HECM remains in the black
The reverse mortgage portion of the Federal Housing Administration‘s (FHA)’s Mutual Mortgage Insurance Fund (MMIF) has achieved a positive capital ratio for its total government-backed portfolio for the fourth year in a row. This is according to the FHAs Annual Report to Congressreleased Friday morning.
In 2023, the HECM capital reserve decreased slightly due to weaker house price growth. This year, that metric was stronger, leading to a 7.78% increase in the standalone HECM capital ratio compared to a year earlier.
The Home Equity Conversion Mortgage (HECM) business remains strong from FHA’s perspective as its economic value has increased while the portfolio as a whole has recovered from the issues that previously placed the portfolio on shaky financial footing.
HECM achieves financial performance
The HECM portfolio accounts for roughly 5% of the total MMI fund, but is largely indicative of the overall health of the FHA’s reverse mortgage program. In recent years, the program has been unstable and maintained a negative capital ratio, but it has remained in positive territory since 2021.
The HECM portfolio “has a standalone capital ratio that increased from 16.72% in FY 2023 to 24.50% in FY 2024,” the report said. “The financial performance of the HECM portfolio improved mainly due to higher expectations for house price growth (HPA). The HECM stand-alone capital ratio remained positive for the fourth year in a row.”
The net present value of HECM cash flow in 2024, a measure reported to Congress by Congress U.S. Department of Housing and Urban Development (HUD), was valued at $8.399 billion, up from $6.742 billion in 2023, according to a actuarial assessment performed by IT Data Consulting, LLC.
Compared to the forward book of business, the HECM portfolio is significantly more sensitive to even small changes in house price growth, but the relatively small size of the portfolio compared to the rest of the fund helps to “the impact of these fluctuations on the combined MMI index’. The capital ratio of the fund,” the report said.
The standalone capital ratio of the HECM portfolio not only remained positive at 24.50% in fiscal 2024, but also surpassed the previous high of 2022 (22.77%). This is despite the fact that overall HECM volume declined in FY 2024 compared to data from a year earlier.
The FHA has approved 26,501 HECMs, totaling $13.36 billion in maximum claim amount (MCA), a 17% reduction from 2023, the report said.
“HECM recommendations increased 106% between FY 2019 and FY 2022, when mortgage rates were at historically low levels,” the report said. “In a higher rate environment, HECM recommendations have declined 59% over the past two years.”
Addressing challenges
The HECM program has come under liquidity pressure in recent years, as was evident with the collapse of the economy in 2022. Reverse Mortgage Financing (RMF), one of the top five lenders in this space and a major HECM-backed securities issuer (HMBS). HUD addressed these challenges in the report, saying that “rising interest rates along with moderating home price growth” were the main culprits for the industry challenges.
HUD described the implementation of changes to the HECM program designed to address liquidity issues, which the department said “reinforced FHA’s commitment to the HECM program as a means for seniors age 62 or older to stay in place continue to live by using the equity in their home. .”
Some of these changes implemented over the past year included updating maintenance requirements to reduce costs; allowing occupancy certification by remote video and/or telephone means; strengthening incentives for servicers and borrowers or heirs to complete alternatives to foreclosure through deeds and short sales; and expediting loan allocation to HUD after clearing delinquent loan obligations.
The report also noted the long-awaited publication of a streamlined HECM section in the Single Family 4000.1 Handbook, guidance that the reverse mortgage industry has been seeking for years and consolidating years of mortgage letters and other policy guidance.
In a statement to HousingWire‘s Reverse Mortgage Daily (RMD), Community Home Lenders of America (CHLA) Executive Director Scott Olson praised the development in the HECM book.
“HECM reverse mortgage loans are an important FHA product and a critical part of our mortgage financing system – so today’s FHA report, which shows continued solid financial performance for FHA HECM loans, is welcome news,” he said. “Additionally, it may in part reflect changes made in recent years to improve loan performance, such as increased deed-in-lieu or short-sale alternatives to avoid foreclosure and faster allocation of loans to HUD.”
As of September 30, FHA has active insurance on an estimated 287,000 HECM loans.
Editor’s note: This is a developing story and has been updated with a statement from CHLA Director Scott Olson.
