For the third time since 2015 after a sustained rocky period in red ink, the Home Equity Conversion Mortgage (HECM) book of business inside the Mutual Mortgage Insurance (MMI) Fund reached a positive capital ratio, according to the Federal Housing Administration (FHA) Annual Report to Congress released earlier this month.
To get a better understanding of HECM book’s performance this year on the government side despite the raft of challenges afflicting the industry, RMD sat down with FHA Commissioner Julia Gordon for an exclusive conversation. The discussion covered HECM performance, recent policy directives for the program and what she wants to communicate to the wider reverse mortgage industry about the contents of the new report.
Chris Clow/RMD: When you see the performance of the HECM book for 2023, what do you think our industry audience should keep in mind?
Julia Gordon: I think the most important thing about the whole Annual Report is how FHA lending, both forward and HECM, remains such an important part of the housing finance system even at a time when we know we’re facing a lot of challenges in the market.
[Your audience should keep in mind] that we are continuing to make loans. And unlike what we saw over the past few years, the vast majority of these loans are not refinances. They are providing a really important service to people whether on the forward side, where we’re giving people access to homeownership, or whether on the reverse side, where we’re giving people access to their equity so they can remain in their homes and age in place.
Clow: Performance of the HECM book remains positive, but perhaps not quite as positive as it was one year ago. How does that detail come together this year for the HECM program?
Gordon: The fact is that the HECM book is uniquely sensitive to home-price projections, not just the actual numbers that we’ve had in the last few years. So remember, when we do this exercise, we’re looking across the whole life of the loan. Projections have clearly slowed from previous years.
This is why, as you reported when I addressed the [National Reverse Mortgage Lenders Association (NRMLA)] conference, that looking at one number like this while we put out this report doesn’t tell you the whole story. Because, of course, we are obligated by Congress to disclose what the ratio is and to provide this report. Sure, it is a directional number. It is good that it is still a strong number and continues to support the MMI Fund as a whole. But the important story is in the words we’ve written in the Annual Report.
Clow: Stability in the program and the industry is certainly on the minds of a lot of the professionals in the space right now. How well do you think the HECM program is set up for stability in 2024 and beyond?
Gordon: The activities FHA has engaged in over the past year have all been designed to help keep the HECM program strong and successful, and we’ve put a lot of time [into] important changes. We’ve [recently] indicated more changes that are coming and have asked for some public feedback on those, and I think these changes are extremely meaningful.
They will support liquidity for issuers and they will also make the program better for borrowers, and that’s a win-win. We’re always looking for in this FHA. So I feel very good about where we are right now. I also feel good about the amount of attention that’s been paid to the program and the ability to build relationships with the industry, and with advocates for the borrowers.
Clow: I spoke with multiple attendees of this year’s NRMLA conference, and it was clear that many were surprised by the show of force from FHA and Ginnie Mae with both your presence there and that of Ginnie Mae President Alanna McCargo. Is this just a recognition of the realities that seniors are facing? What do you think is underpinning the additional attention that is going to the HECM program?
Gordon: Well, I think it’s a combination of things. First and foremost is a recognition of the fact that our society is aging. Based on numbers that we have, lots of seniors who have home equity and who may need to tap that home equity may not be in a position to do that through other products such as [Home Equity Lines of Credit (HELOCs)]. So, the HECM product remains incredibly important for this growing population.
And we know that this population needs to be mindful of not just maintaining their homes by keeping them current and keeping repairs up to date, but to increasing energy efficiency to increase climate resilience. And in the case of seniors, to increase accessibility. So there are lots of reasons. We know that people will need to tap their home equity, and we believe this is an important product to do that.
Of course, I would be disingenuous if I didn’t say some of the attention was because the macroeconomic environment in some ways uniquely stressed the HECM program, and we set out to shore that up and relieve some liquidity pressures.
Clow: Is there anything that I haven’t asked you that you think our industry audience should most take away from HECM program performance, the MMI Fund itself or other relevant issues that are related to the Annual Report?
Gordon: I guess just a reminder that while you’re reporting on the HECM program, HECM is only about 5% of the total [FHA] portfolio. So, I think it’s important for your readers to look at the performance of the portfolio as a whole. The overall capital ratio as well as the actual amount of capital remains extremely strong, and we project that will continue to be the case even as home price appreciation, flattens out over the years.
Because it doesn’t have quite as big an impact on the forward capital ratio as it does on the HECM capital ratio. So, to me, this Annual Report is a strong report that demonstrates that we can manage this program in a way to continually improve what we’re offering to borrowers. For example, we had the reduction in [mortgage insurance premium (MIP)], which was really helpful to borrowers at a time where the prices for everything else were going up. And we were able to do that in a prudent way.
That keeps our capital ratio very strong, and I can’t underscore enough how important it is for everybody to understand that this is something that can be done.
