HECM - A Product That Needs More Help And Fewer Excuses

It’s interesting that so much coverage and debate was extended off of a comment I made regarding the impact of the HECM (the FHA reverse mortgage) program on the FHA MMI (Mutual Mortgage Insurance) fund. For reference I am attaching two slides below, of many more that are available, used in various presentations on the MMI fund that show the impact of HECM and financial risk.

It’s good to see that some changes have been made for the better, and that FHA Commissioner Brian Montgomery is at the helm with his deep expertise in this product. The fact is that FHA has been unable to predict the performance of the HECM product for years and this crosses both democrat and republican administrations. This years 2018 report to congress, as required by statute, was no exception. While people can debate recommendations for changing the program, I only have two simple thoughts to consider:

First, if you were a lender and had a program of relatively small volume that under independent actuarial review would expect billions of losses over the duration of the portfolio (north of $10bb as is the case this year) what would you do? As a former mortgage executive I can tell you I would shut it down, at minimum temporarily, until I could construct it in a safe and sustainable way. There is reason the major HECM lenders of the decade before the recession have exited the program completely, leaving a new crop of reverse lenders without the legacy problems to offer it.

Second, if your team that managed a mortgage product could not predict with any accuracy the future performance and value of a program like this, and this had been going on for years, why would you have any confidence in the next years prediction? Fool me once shame on you, fool me twice shame on me. 

My view is simple; It’s math - not emotion. My recommendation was, and still is, that this needs greater attention and should include some basic things, some of which have been at least partially implemented. But there is more to be done. Just look at the two slides above - they don’t trend in a direction that would create confidence.

I have said this over the years, this product has troubled me because it mixes commissions and profits with a program for seniors who may be at a more fragile point in their lives where they can be subjected to unfair treatment. There is a responsibility here that should exclude profit seekers in the discussion. To highlight this concern, just read this portion of a post in an AARP Bulletin years ago that was written by the NCLC:

”A word of caution to older Americans considering reverse mortgages: Tread carefully. According to a report by the National Consumer Law Center (NCLC) released Tuesday, some of the same lenders that sold risky subprime loans to millions of homebuyers—fueling the real estate boom and bust—are now targeting older people with misleading claims involving reverse mortgages.” The point is, that these behaviors can return and with tighter loan volumes and the need to survive, we all need to make sure we fence off any unsustainability in this product.

In the end, I am certainly not the expert here and frankly I did not fix this product when I was FHA Commissioner so I recognize the challenges involved. But the bottom line is this; the HECM product has been a money loser to the taxpayer, is targeted towards a more fragile portion of society that is growing demographically, is impacting how the much larger forward business gets priced, and poses significant uncertainty risk.