Here are some interesting facts and figures from FHA and Ginnie Mae’s 2023 Fiscal Year-End reports, as well as Fannie Mae’s 3rd Quarter report. We include our views on what the numbers tell us.
FHA’s recent report, “Financial Status of the FHA Mutual Insurance Fund FY 2023” (the “MMI Report”), showed that the HECM program’s capital position remains strong despite reductions in future projections of production and home price appreciation. However, the numbers also reveal some flaws in the HECM program.
Type I Claims and Losses Remain Low
Claim Type I represents claims from natural payoffs, that is, when the underlying HECM loan is paid off and the investor of record files a claim for realized losses, resulting typically from loan liquidations where the payoff proceeds are less than the unpaid loan balance.
The Mutual Mortgage Insurance Fund (“MMI”) report shows less than $700 million in Type I Claims over the last 3 years, during a period where over $27 billion loans paid off naturally (Table D-20 p. 120). That implies a loss rate of about 2.5%, pretty good compared to the MIP that is collected: 2% upfront on the Maximum Claim Amount “MCA,” plus 0.50% per annum on the loan balance. However, there was an uptick in these claims in FY 2023, probably due to the significant reduction in refinancings, which generally take place earlier in the loan life and result in full payoff of the underlying loan.
Type II Claims Rise Sharply, but FHA Report Optimistic About Losses
Claim Type II represents HECM loan assignment when the HECM reaches 98% of the MCA. The Type II claimant, typically an HMBS issuer, “assigns” the HECM loan to HUD and receives a price of par in exchange. The assigned loan becomes part of HUD’s “Secretary’s Notes“ portfolio.
Claim Type II payments rose to $5.4 billion in FY 2023, up from $1.9 billion in FY 2022 (Table D-20 p. 120). The vast majority of HECMs are adjustable rate, so the sharp run-up in interest rates accelerates the increase in reverse mortgage loan balances. This in turn accelerates the date at which each loan reaches its 98% claim threshold.
From FHA’s perspective, a Claim Type II payout is not necessarily a loss. By honoring a Type II claim, HUD purchases a seasoned HECM loan at par. The loan balance may exceed the underlying property value after several years of negative amortization, but usually years of home price appreciation mitigate or even exceed the increase in the loan balance. Also, the federal government has a very low cost of financing compared to the interest rates of these Secretary’s Notes.
As a result, many of the Secretary’s Notes are worth more than par, in other words, the present value of the expected payoff exceeds the par price that HUD paid for the loan. This can be seen on Table E-20 page 131 of the MMI report, where FHA shows the total cash flow it projects for the HECM program from all HECMs outstanding as of the end of FY 2023. FHA breaks down the cash flow into Premiums, Claims, and Recoveries. Recoveries are basically subsequent cash flows from the payoffs of Secretary’s Notes.
Overall, FHA projects favorable cash flow for the HECM program. For the next four years, FHA projects negative cash flow due to Claim Type II assignments exceeding $1 billion in each Fiscal Year, but subsequent payoffs will gradually tip the cash flows into the black, resulting in strong positive cash flow for several years thereafter. The net result is that FHA’s HECM capital position is $11 billion dollars, or 16.72% of Insurance-In-Force, or “IIF.”
Reversal of Fortune: HECM Serious Default Rates Lower Than Forward Mortgage Loans
In a blog entry earlier this year we wrote, “The data show a very strong reduction in T&I default in the post-FA period. As of March 31, 2015, the pre-FA data set had a T&I default rate of 7.1%, and an overall serious default rate of 10.5%. As of March 31, 2023, the post-FA data set shows a T&I default rate of approximately 0.9%, and an overall serious default rate of 2.3%. For the purpose of this analysis, we define serious defaults as T&I defaults plus Referrals to Foreclosures, actual foreclosures and other “Called Due” status loans. These results remain consistent when we compare comparable cohorts by loan age.”
FHA reports that serious delinquencies in its forward program are now 3.93% (MMI report p. 86), trending down from a COVID-era peak of 11.9% at the end of FY 2020, and about the same as March 2020’s 3.97% (MMI report, p.14).
A Shrinking Market
The MMI Fund’s Insurance-In-Force equals the total Unpaid Balance of all HECMs in the MMI Fund. IIF declined from just under $73 billion at the end of 2017 to just under $66 billion at the end of 2023 (FHA MMI report, p. 60). The sum of low levels of current production, plus additional amounts lent on existing loans, plus the roll-up of existing loans, is less than the total amount of payoffs from existing loans. Many old portfolios are running off without being replenished by the investor, including Fannie Mae’s (see below), Ginnie Mae’s, and the remnants of HMBS issuers from days gone by, such as Reverse Mortgage Solutions (“RMS”).
The total amount of HMBS outstanding has remained very stable for years, never totaling less than $53 billion or more than $60 billion for the past eight years. The vast majority of HECM loans are securitized into HMBS, and the rest are held by FHA as Secretary’s Notes, held by Fannie Mae, or held on lenders’ balance sheets on a short-term basis before or after HMBS certification.
Fannie Mae’s HECM loan portfolio has fallen from a peak of $50.9 billion in 2011 to $6.9 billion in RM loans and securities as of September 30, 2023. Nine months earlier, as of December 31, 2022, Fannie had over $11 billion in RM loans and securities, implying a very fast payoff rate. Fannie Mae has not purchased a HECM since 2010 (FNMA 2023 Q3 10-Q p. 20 & various FNMA 10-Ks).
Fixed Broken
Tables D-18 and D-26 in the MMI report show the vanishing numbers of the endangered species known as the fixed-rate HECM loan. As recently as 2013, nearly 40,000 newly endorsed fixed rate HECM loans roamed the Plains of North America. In FY 2023, FHA endorsed 306(!) fixed rate HECMs.
The reason for this shockingly low statistic deserves its own blog. Suffice to say that fixed rate HECMs were driven from their natural habitat by new rules regarding how much initial borrowing is allowed, and for what purpose. These rules favor adjustable rate loans, which can have a line of credit, and the resulting economic incentives drove the result: only 1% of HECM loans were fixed rate in FY 2023. This is down from a peak of 65% in FY 2012, before those rules changed the product mix.
Unlike term or tenure loans (see below), fixed rate loans were the loan of choice for reverse mortgage loans when the borrower was offered the option on equal terms, especially loan proceeds.
Nobody Wants Term and Tenure Loans: Get Rid of Them
HUD reports in the FHA MMI Fund FY 2023 report that neither Term nor Tenure loans have exceeded 1% market share in the past 14 years (MMI Fund Report, Table D-30, p 126). That means just a few hundred borrowers choose these loans each year. A few more borrowers choose the Modified version of these loans that also includes a line of credit.
Why do Term or Tenure loans exist? They only add to the “complex mortgage” label that HECMs labor under; these unwanted loan types are just one more thing (actually four more things) that has to be crowded into that kitchen table discussion. They add needless complexity to servicing, reporting, and cash flow modeling. Besides, any borrower can take out a line of credit loan and simply draw a fixed amount each month if they like. Unlike fixed rate HECM loans, which would be popular if allowed to compete fairly with adjustable rate HECMs, Term and Tenure loans just aren’t needed or wanted.
Data So Nice They Printed it Twice
Table D-27 (MMI Report, p. 124) shows the dramatic decline in Principal Limits as a percentage of Maximum Claim Amount. This table tells you almost everything you need to know about why the MMI fund’s HECM capital position has improved. (The other part you need to know is Financial Assessment, which we have discussed at length in previous blogs.) The table column labeled “Average Principal Limit as a Share of Maximum Claim Amount” is basically original loan-to-value (“LTV”) including the available line of credit. As FHA steadily reduced its Principal Limit Factors (“PLF”) downward during this period, Average Principal Limit as a Share of Maximum Claim Amount fell steadily from 70.23% in 2009 to 46.96% in 2023.
With Original LTVs so much lower, fewer HECM loan balances exceed property value.
Table D-28 is a reprint of Table D-27, but if we’re being fair, it’s worth a second look.
Younger Sister Imitates Older Sister
Meanwhile, Ginnie Mae took over the RMF HMBS portfolio in December 2022, thus becoming “Issuer 42.” Ginnie Mae still holds an $18.3 billion portfolio as of November 30, 2023. In its new capacity as an HMBS Issuer, Ginnie ” … purchased $695.8 million in reverse mortgage loans, at fair value, representing additional principal draws by borrowers and made $3.4 billion to HMBS investors on HMBS obligations. … $1.5 billion in proceeds from repayments of reverse mortgage loans were received from borrowers” (Ginnie Mae Annual report p. 26).
So far, Ginnie Mae has not issued tails nor has she sold any of her holdings. In the absence of these measures, Ginnie Mae’s uncertificated portion will increase over time, and so will payoffs. Ginnie Mae will receive the uncertificated portion of each loan’s payoff. Draws and other advances will decline over time. Eventually, Ginnie Mae’s cash flow from the RMF portfolio will turn positive, probably sometime during 2025. Thus far, Ginnie Mae is following her older sister Fannie’s example: remain idle and collect cash as your multi-billion dollar HECM portfolio runs off.