The Federal Housing Administration (“FHA”) published on New Year’s Eve its FY 2025 Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund (“MMIF” and the “Report”). This Report’s release was delayed six weeks by the federal government shutdown. It was worth the wait. The Report contains not only good news about the solvency and financial strength of the MMIF, but it is also the most complete and informative MMIF report to date.
Last year we suggested FHA expand its disclosure: “The FHA’s reporting on the Home Equity Conversion Mortgage (“HECM”) program can be further improved through additional data transparency, for example, providing loss severity for all HECMs, particularly for the Secretary’s Notes. A table summarizing key metrics, including payoff counts, beginning balances, and ending balances, loss frequency and severity, would highlight the impact of program changes, and servicing changes, on financial outcomes.” This year’s Report contains many of these key metrics; thank you, FHA.
As a result, we can analyze the MMIF more clearly and completely than before. Both the forward and reverse mortgage programs are in solid financial condition. The data also further validate and confirm our responses to HUD’s Request For Information (“RFI”) which we and many other industry participants submitted in December.
The MMIF Report reveals that the program has a capital ratio of 24.06%, down slightly from last year’s astonishing 24.5% capital ratio. This is over 12 times the required 2% capital ratio. As was the case last year, FHA’s HECM Claim Type II loss is negative, in other words, FHA is making a profit on its HECM claims. Is this an insurance fund or a hedge fund?
For four consecutive fiscal years, 2016 through 2019, FHA reported that the HECM program was deeply in the red. Many forward mortgage industry leaders were calling for the HECM program’s banishment to a separate fund; a Wall Street Journal editorial called for its abolishment. We argued at the time the FHA estimates were too pessimistic, and that in time the combined effect of FHA’s reforms and positive home price appreciation would put the program back in the black. As early as 2017 we wrote of the data showing the positive effects of FHA’s reforms, such as lower default rates from improved financial assessment (“FA”). Also, four rounds of lower Principal Limit Factors (“PLFs,” allowable loan-to-value ratios) gave significantly more home equity cushion to the HECM program, reducing FHA’s HECM loan loss frequency and severity. (In 2009 we initiated our New View Commentary blog with the opinion the program’s PLFs and default rates were too high.)
In October of last year, HUD posted its somewhat ominous RFI, which posed several questions that some in the industry interpreted as saying “why do we need this program?” Please see New View’s blog for our RFI Response.
Highlights from the FHA MMI Report:
Last year we stated: “… Perhaps most astonishing is the FHA’s statement that the program’s claim loss is negative. According to the MMIF Report (p 82) “… FY 2024 was unusual because the combination of the upward trend in Home Price Appreciation (“HPA”), which results in increases in underlying collateral, along with an unusually large number of assignments created a shift where the NPV of losses was reduced so significantly that it produced an annual gain.” The accompanying figure (Exhibit IV-11) shows a positive Net Present Value of $4.59 billion for claims as of the end of FY 2024, versus an NPV claim loss of $0.83 billion at the end of FY 2023. Claim Type I and Supplemental Claim losses in past years were significantly worse (See Exhibit III-30 p 121).”
It turns out FY 2024 was not so unusual. FY 2025’s results were similar, but unlike last year, the latest MMIF Report gives more detail behind the headline numbers. In doing so, the latest Report reinforces our thesis from the RFI: the HECM program is on solid financial ground but needs substantial reform to make it more manageable for HUD, and HECM more understandable for senior borrowers.
Here are some examples:
Table B-27 (p. 130): Nobody wants term or tenure loans. Get rid of them. HECM Term Loans are the New Coke and HECM Tenure Loans are the Crystal Pepsi of reverse mortgage. The “Modified” version of each of these adds a McDLT sandwich; they are slightly more popular, but not much.
Table B-33 (p. 134): In FY 2025, Fixed Rate HECM had a 0.14% market share. Unlike term and tenure loans, HECM borrowers want fixed rate loans. As the table shows, in fiscal years 2010-2013, fixed rate loans were the majority of HECM loans. During that time, there were no restrictions placed on fixed rate borrowers initial draw, other than the Initial Principal Limit (“IPL”) itself.
But beginning in 2014, the structure of the program was changed by Mortgagee Letters 2013-27 and 2014-11, which steer HECM borrowers towards adjustable-rate loans. These two mortgagee letters, taken together, prevent fixed-rate borrowers from borrowing the full Principal Limit, whereas adjustable-rate borrowers can circumvent this requirement by using their ever-increasing line of credit.
Table B-37 (p. 136): Claim I Losses and Supplemental Claims totaled approximately $241 million in FY 2025, down from just over $300 million in FY 2024, or about 0.38% of the $64 billion Insurance-in-Force (“IIF”) for HECMs in the MMI Fund. This annual Claim loss rate is less than the ongoing 0.50% annual Mortgage Insurance Premium (“MIP”) alone.
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FHA continues to make significant gains on its buyout portfolio, or “Secretary’s Notes.” As we pointed out last year, FHA earns a handsome excess spread equal to the gross interest rate on the Secretary’s Notes, minus FHA’s funding rate, minus any losses.
The Secretary’s Notes portfolio accumulates from Claim Type II HECM assignments made to HUD. HUD purchases HECMs from investors at par when the HECM loan reaches 98% of its Maximum Claim Amount (“MCA”), i.e., the underlying property value at the time of origination (subject to a cap). Several years elapse between loan origination and the 98% MCA assignment, meaning that FHA benefits from any home price appreciation during those years.
In other words, like a hedge fund, the Secretary’s Notes portfolio is a leveraged fund that buys assets at a favorable price (par) and earns a healthy excess spread. Also like a hedge fund, it succeeds when it manages its assets properly, hires a good servicer, and benefits from favorable economic conditions, but also assumes a significant amount of risk from home price declines due to most any unfavorable economic condition.
Claim Type II is by far the largest claim category, but remember that $5.8 billion in Claim Type II Amount Paid is HUD buying a loan at its Unpaid Principal Balance or par amount. This leads us to Exhibit II-17 on page 77 and Table C-17 on page 145 which reveal the astonishing statistic that no material losses have been recorded for any HECM originated after FY 2017. Let us repeat that; no material losses have been recorded for any HECM originated after FY 2017.
For the HECM cohorts originated in FY 2016 and 2017, a significant majority of loans have paid off, and losses have been very small: 2% and 1% for 2016 and 2017 loans respectively. According to Table C-17, no HUD-held loans originated after 2013 have experienced any material loss. For HECMs originated in FY 2018, 61% have paid off; no losses of any kind are shown for this cohort.
Last year we estimated the Secretary’s Notes portfolio, i.e., HECM loans assigned to HUD through Claim Type II, totaled about $40 billion in Unpaid Principal Balance, with an average gross interest rate (including MIP) of about 7.5%. Table C-16 on page 144 suggests that HUD now holds $49 billion HECM loans as Secretary’s Notes, consistent with our estimate last year, allowing for an increase due to new buyouts, draws and rollups of prior buyouts, net of payoffs.
The terms of Claim Type II require the assigned loan to be Active, that is, not in default or matured status. Inevitably, some of these loans do go into default after assignment and will experience “crossover” loss, where the loan balance exceeds the property value at the time of loan liquidation, but many never default, and they pay off without any realized loss.
Table C-17 shows the details of HUD’s gains or losses by fiscal year of HECM origination and Loan Status or Resolution. Each row represents a fiscal year of HECM loan origination. Each column shows the percentage of loans in that cohort by Status, or current disposition, including whether HUD gained or lost upon final disposition of the loan. This chart is the MVP of the entire report, the sort of table we asked for last year. Notable among the results it shows:
1) Of the HUD-held Secretary’s Notes that have paid off, HUD has earned a gain more often than a loss for every cohort; and
2) HUD has suffered no losses on HUD-held loans (or at least no material losses that round off to 1% of more) for any cohort.
The decline in losses has many causes which we have discussed in our response to the RFI and other blog entries:
Financial Assessment: FA measures, implemented in 2015, have proven effective. Older, riskier loans are diminishing as a share of the portfolio. Only about 15% of the current HECM portfolio consists of pre-FA loans. We have discussed this at length in other blog entries.
Servicing Enhancements: Much of the improved performance of the Secretary’s Notes happened after a new subservicer was appointed. The importance of special servicing, that is, handling of defaults and foreclosures, cannot be overstated. Loss severity before and after this change merits further detailed analysis.
Home Price Appreciation: Rising property values have reduced the frequency and severity of crossover losses, providing a significant buffer for the MMI Fund.
Lower Principal Limit Factors: Four successive PLF reductions have reduced the frequency and severity of crossover losses, providing a significant home equity buffer for the MMI Fund.
Corrected Forecasting Errors: Past reports, particularly in 2018 and 2019, underestimated long-term financial health. The 2024 FHA Annual Management Report (e.g., p. 44) seems to acknowledge these inaccuracies, with current data reflecting a more realistic and positive trajectory.
HECM originations remain weak because, as we keep stressing, the very high upfront MIP reduces HECM volume significantly. HECM borrowers must pay a 2% upfront MIP on the MCA, which can exceed $20,000. This staggering upfront fee is a non-starter for many potential borrowers.
IIF fell for the third year in a row, to $64 billion, 12% lower than its peak at the end of FY 2017. HECM liquidations are outpacing new production by nearly a factor of three each month. Even after interest rate rollup and additional draws, total HECMs outstanding continue to shrink about $1 billion per year.
This trend could accelerate as the outstanding HECM book ages. Unless the industry can increase its production significantly, we estimate at current rates of production the HECM IIF for the MMI fund will fall to less than $40 billion in about ten years, a little more than half its $72 billion 2017 peak.