Risky Business

A new Urban Institute blog post poses an intriguing question: should the Federal Housing Administration (FHA) remove Home Equity Conversion Mortgages (HECMs)—reverse mortgages—from the agency’s Mutual Mortgage Insurance (MMI) Fund?

The MMI Fund provides insurance for two programs: a forward mortgage program and the HECM (reverse) program. According to a November report to Congress on the MMI fund, the report shows that the MMI Fund supports $1.23 trillion of insurance-in-force and had a capital rate of 2.09 percent. The numbers for the two different mortgage programs are very different, however.

As reported by Urban Institute, the forward program supports “$1.15 trillion in current insurance-in-force (8 million mortgages), [has] a capital ratio of 3.33 percent, and an economic net worth of $38.4 billion.” On the other hand, the HECM program numbers break down to $73 billion in current insurance-in-force (413,000 mortgages), a capital ratio of -19.84 percent, and an economic net worth of -$14.5 billion.

As the Urban Institute’s post explains, “The forward program, with 93.5 percent of the total insurance-in-force, has a capital ratio well over the statutory minimum. The reverse program, with 6.5 percent of the total insurance-in-force, shows the opposite, and its volatility makes it difficult to model. This puts the dependability of the reverse mortgage estimate in doubt.”

Urban Institute’s post points out that it’s very difficult to estimate the performance of the reverse mortgage program. Between 2012 and 2017, the capital ratio for the HECM program has varied wildly, ranging anywhere from -19.84 percent to 3.07 percent, and has shown year-to-year variations of 8 to 14 percent. On the other hand, the forward program’s capital ratio has only varied between -1.34 percent and 3.33 percent. Calling HECMs volatile by comparison seems like a bit of an understatement.

You can read more of Urban Institute’s thoughts on why the HECM doesn’t belong in the MMI Fund by clicking here.