Highlights from the FHA MMI Report:<\/strong><\/p>\n\n\n\n
Last year we stated: \u201c\u2026 Perhaps most astonishing is the FHA\u2019s statement that the program\u2019s claim loss is negative. According to the MMIF Report (p 82) \u201c\u2026 FY 2024 was unusual because the combination of the upward trend in Home Price Appreciation (\u201cHPA\u201d), 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.\u201d 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).\u201d<\/p>\n\n\n\n
It turns out FY 2024 was not so unusual. FY 2025\u2019s 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.<\/p>\n\n\n\n
Here are some examples:<\/p>\n\n\n\n
Table B-27 (p. 130):<\/strong> 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 \u201cModified\u201d version of each of these adds a McDLT sandwich; they are slightly more popular, but not much.<\/p>\n\n\n\n
Table B-33 (p. 134):<\/strong> 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 (\u201cIPL\u201d) itself. <\/p>\n\n\n\n
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.<\/p>\n\n\n\n
Table B-37 (p. 136):<\/strong> 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 (\u201cIIF\u201d) for HECMs in the MMI Fund. This annual Claim loss rate is less than the ongoing 0.50% annual Mortgage Insurance Premium (\u201cMIP\u201d) alone<\/em>.<\/p>\n\n\n\n
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FHA continues to make significant gains on its buyout portfolio, or \u201cSecretary\u2019s Notes.\u201d As we pointed out last year, FHA earns a handsome excess spread equal to the gross interest rate on the Secretary\u2019s Notes, minus FHA\u2019s funding rate, minus any losses. <\/p>\n\n\n\n
The Secretary\u2019s 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 (\u201cMCA\u201d), 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.<\/p>\n\n\n\n
In other words, like a hedge fund, the Secretary\u2019s 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<\/strong> 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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
Last year we estimated the Secretary\u2019s 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\u2019s Notes, consistent with our estimate last year, allowing for an increase due to new buyouts, draws and rollups of prior buyouts, net of payoffs.<\/p>\n\n\n\n
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 \u201ccrossover\u201d 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. <\/p>\n\n\n\n
Table C-17 shows the details of HUD\u2019s 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:<\/p>\n\n\n\n
1)\tOf the HUD-held Secretary\u2019s Notes that have paid off, HUD has earned a gain more often than a loss for every cohort; and
2)\tHUD 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:<\/p>\n\n\n\n
Financial Assessment:<\/strong> 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:<\/strong> Much of the improved performance of the Secretary\u2019s 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:<\/strong> Rising property values have reduced the frequency and severity of crossover losses, providing a significant buffer for the MMI Fund.
Lower Principal Limit Factors:<\/strong> 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:<\/strong> 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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
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.
<\/p>\n","protected":false},"excerpt":{"rendered":"
The Federal Housing Administration (\u201cFHA\u201d) published on New Year\u2019s Eve its FY 2025 Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund (\u201cMMIF\u201d and the \u201cReport\u201d). This Report\u2019s release was delayed six weeks by the federal government shutdown. It was worth the wait. The Report contains not only good […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-2835","post","type-post","status-publish","format-standard","hentry","category-hecm-program"],"_links":{"self":[{"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/posts\/2835","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/comments?post=2835"}],"version-history":[{"count":2,"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/posts\/2835\/revisions"}],"predecessor-version":[{"id":2839,"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/posts\/2835\/revisions\/2839"}],"wp:attachment":[{"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/media?parent=2835"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/categories?post=2835"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/newviewadvisors.com\/commentaries\/wp-json\/wp\/v2\/tags?post=2835"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}