UPDATE – $798 Million Subsidy Request
June 8, 2009
After a great deal of interest around the industry from our recent post on HUD’s FY2010 subsidy request for the HECM program, some friends in the industry have been kind enough to help clarify some questions we raised in the original post.
In the original piece we offered several possible perspectives for understanding the size of the request relative to the HECM program, a way to back into HUD’s estimates as to how much the program costs relative to the MIP premiums that we see everyday.
- The first point to clear up is that the budget request is not applicable to cash claims to be paid in FY2010 due to prior year loans terminating. It’s a projection of current cash needed to fund the present value of future losses from loans above and beyond MIP.
- That underlines some of the thoughts in the ‘insurance’ section of the original piece, and we’ll specifically focus on our second bullet point there – the subsidy request is in fact for expected performance of just FY2010 HECMs under the new assumptions. This means HUD is telling us that on top of the 200 initial MIP and additional 100-250 monthly MIP accrued over the life of the average loan (depending on draw and interest assumptions), they’re expecting an additional 266 basis points of claims in present value terms ($798 million divided by $30 billion total endorsed). That suggests the current MIP premiums, which already represent one of the two largest costs of the program to borrowers, would have to rise 60-90% to fully offset expected claims if nothing else changes.
As the world stands today it seems we have four options at this point, any combination of which might form the best answer:
- Ongoing subsidy requests by HUD to fund claims in excess of premiums – relying on continuing political favor each year, indefinitely
- Increasing MIP – already one of the largest and most visible program costs to consumers and we’re not hearing many originators saying there’s a lot of room to raise from a consumer acceptance perspective
- Reducing LTVs – as much as the higher loan limits have helped the industry recently, lowered LTVs have the potential to substantially reduce the appeal of the product, although this might open a wider door for proprietary products at some future time (a thin silver lining for now)
- Limited endorsement authority – capping the HECM production on an annual basis at some level lower than otherwise expected production
Our industry faces a major decision. If we believe the new assumptions are likely to continue indefinitely (and I don’t think many people are predicting a rapid rebound in home prices at this point), then we can either let our future be decided for us through the appropriation process or suggest an alternate course (or courses) to set our industry on a more independent path.
If our industry wants to re-instate our status as a budget-neutral program that cannot be attacked as a giveaway to seniors, we have a very important discussion in front of us on the best way to achieve that goal. It seems premature to suggest that lowering LTVs or raising MIP is the best way to achieve the goal, even if we may end up there eventually, simply because it’s too important to rely on back of the envelope assessments of such critical economic elements of our industry.
Call us biased, but we’d suggest that the next step in this case should involve a rigorous analysis of the substantial history we’ve created as an industry to craft a reasoned, intelligent, and most importantly, factual, recommendation for the HECM product’s future. We’re certainly not suggesting that a recommendation would emerge unscathed from the deliberation process, but it seems the surest path to reasonable discussion – with the industry having more than a token presence at the table.
What do you think?
I think the Reverse Mortgage Industry better figure out what it would cost the U.S. Taxpayers if Seniors were forced to leave their homes for nursing home care. Try thousands (millions?) times 5, 6, or 7 thousand dollars a month. It’s an economic blessing for the U.S. taxpayer that Seniors are willing to use their home equity to take care of themselves. One of these days, the U.S. will be economicly forced to close our Boarders to unwanted, evil
doers: Then, we can stop wasting Billions of tax (debt) dollars supporting troops in Iraq, Afghanistan, Korea and elsewhere around the world. Let the troops protect our boarders. And, stop sending Billions each year to Countries like Egypt, Pakistan, Israel, Iraq, and who knows where else. Let’s cut petroleum fuel use by 10% and stop buying same from the Saudis, most of who openly despise Americans. We must learn we cannot buy friendship from people who hate our guts. By the way, you sons of bitches who think I am unAmerican; I was a Green Beret and my second Son is now flying Boeing Chinook Helicopters in Irag, after a one year tour in Afghanistan. Can you say the same thing? It’s time to start spending all of our tax dollars (debt) on taking care of US Citizens, including funding Reverse mortgages for Seniors where necessary.
I would like to see the actual numbers not assumptions. I find it hard to believe that FHA is having a loss on this program due to claims.
I think you are overreacting about the future. The fact is that there will be claims paid in the next few years because of loans that closed in the past few years at inflated appraised values, but the converse will apply ten and fifteen years in the future when values will rise from their current point and ther will be far fewer claims.
Jim Blythe,
We’d love nothing more than to see the real numbers, but the President’s budget assumptions are not publicly available – we’ve asked that question directly. In absence of that, we as an industry are left with few alternatives.
I would suggest that HUD doesn’t have any information on claims and losses that we as an industry collectively haven’t given them, so why don’t we just put that information together again for analysis by the industry?
Michael Pinter,
It’s important to remember that the issue at hand is independent of what might happen with loans that have closed in the past. HUD made a projection for loans to be closed Oct09-Sep10 (FY2010), so the past appraisal issues don’t touch the $798 million subsidy request.
We’d certainly expect significant claims from loans closed in the past few years, but HUD is prudently separating these issues.
We are talking about loans that were originated with a one or one and a half margin. As these indices go up and with the margins we are using today the interest accrual is going to be substantially higher than we have seen to date. How will that affect the budget-neutral status?
The only thing that keeps it going is the FHA (HECM) buy
back guarantee to Lenders: re: When the pay outs reach
98% of FMV, they get to ship the package to HUD. What ever
it takes to keep the guarantee intact it the amount we
will have to fund. Could that be a combination of Senior
Self Funding (MIP) and some direct government subsidy?
If the (MIP) collected from the beginning of the HECM program was not put in a general fund and used on wasteful programs we probably wouldn’t be having this conversation.
If the premiums collected from seniors were put in a R.M. account earning premiums I believe HUD would not have their hand out looking for funding. Obama is handing money out like candy but will our seniors get pillaged with higher premiums? It’s the old story “robbing Peter to pay Paul”