New View Advisors published an interesting analysis on the risk profile of the Federal Housing Administration’s reverse mortgage program (HECM).
Using an actuarial analysis published by IBM in October 2009 and FHA’s Annual Management Report (AMR) for FY 2009, New View anticipates that we can expect a tightening of ending standards across FHA’s entire program, both forward and reverse.
For years there has been a group of people who believe that due to the frontloaded MIP structure of the HECM program, the cash generated has been used to subsidize other parts of FHA’s business.
However, New View writes that the dramatic increase in the HECM Loan Liability Guarantee (LLG) which is used to estimate the present value of projected income and costs make it clear that the HECM program is not subsidizing the rest of FHA.
According to the AMR, the LLG rose alarmingly from $19.3 billion in FY 2008 to $33.9 billion in FY 2009, up 75%.
HECM accounted for $4.4 billion of this increase, not an insignificant amount. Overall, HECM LLG nearly quadrupled, from $1.5 to $5.9 billion.
This amount represents, in effect, the negative net present value of the HECM program, and exceeds the total amount of MIP ever collected. Most of this is concentrated in the GI fund, not the MMI fund.
The AMR attributes says this “increase in liability is primarily due to the drop in house price appreciation projections … [which] results in lower recoveries from future HECM assigned assets which increase the liability.”
True, but the reversal of fortune for the LLG surely also reflects the house price depreciation that began in 2007 and continued through FY 2009.
Therefore, given the uncertain state of the housing market, and its diminished capital position, FHA was justified in reducing the HECM principal limits says New View.
