FHA HECM IS NOT THE PROBLEM
Drecember 4,2012
The FHA released its FY 2012 HECM Actuarial Study and MMI Fund Report on November 16. The report reflects many changes to their economic and modeling assumptions, resulting in significantly higher projected losses for the FHA program but the HECM will gradually improve each year as old loans paid off and were replaced by new HECMs with lower Loan-to-Value (LTV) ratios, higher MIPs, and less underlying home price erosion.
The FY 2009 HECMs were originated under a higher Principal Limit Factor (PLF) table, so these loans have significantly higher LTVs than later vintages. FHA receives only 0.50% annual mortgage insurance premium (MIP) for these loans. Over 100,000 FY 2009 loans remain outstanding. The FY 2010 vintage has significantly lower PLFs, but also has the lower 0.50% MIP. This vintage has suffered only a 5% average home price decline since October 30, 2009. The last two vintages, FYs 2011 and 2012, have lower PLFs, a much higher annual MIP (1.25%), and have suffered comparatively little, if any, home price deterioration.
Even in a flat flat market it should lower expected losses in HECM NOT RAISE IT
The FY 2012 Financial Statement Audit shows a $5.5 Billion MMI LLG, which reflects the favorable home price increases of the third quarter of 2012 and other adjustments. Still, this implies an average 15% loss level, which overstates the risk of the HECMs in the MMI fund...
Most of the problems are from loans in the GI Fund that were originated in 2005 to 2008. Many of these loans are deeply underwater, which is why they have such sharply high frequency and severity of loss. They cannot be relied upon as a historical benchmark for the MMI loans; these distressed GI loans will have much higher frequency and severity of losses compared to the MMI loans.
The really big differences came from changes in the model’s methodology for measuring loss from defaults. These include tax and insurance defaults and also the losses resulting from loans that end up in foreclosure. These loans have very high loss severities because of the legal, maintenance, and disposition costs that arise during the lengthy process of foreclosure.
Tax& Insurance set aside or escrow would solve most of the problems with defaults and foreclosure.
The inaction on this issue has been costly.
Can it be that after 70 yrs on earth seniors actually forget or refuse to pay taxes and Insurance.
If they are not able to pay for taxes and Insurance then they would not even be able to afford RENT. No the problem is simple they can`t manage their budget and need to do it monthly the way they did it their entire life.
FHA must operate under the budget rules that force it to act now and close the gap sooner, which paradoxically means changing a product that, in its current form, is probably not contributing to the problem.
The Forward FHA Product may be the real problem where research shows no amount of adjustment to MIP and FICO requirements will fix the problems caused by overleverage. Unlike the current forward mortgage FHA program, the existing HECM loans being originated today are not making the situation worse.
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