UPDATE – $798 Million Subsidy Request

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?