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Analysis of HUD/FHA Guarantees for HECM Credit Lines

Ongoing Research Project at University of California at Santa Barbara

By Janet Duncan FCAS, FSA, Ian Duncan FSA, Pete Neuwirth FSA, FCA, and Barry Sacks JD, Ph.D

HUD/FHA Guarantees and the MMI Fund

  • HUD/FHA guarantees are critical to the long-term viability of the HECM market as well as the effectiveness of retirement income strategies employed by “house rich” retirees utilizing HECM’s
  • FHA guarantees are funded via up front and ongoing “Mortgage Insurance Premiums” (MIP’s) set by HUD
  • MIP’s historically set at 0.5% (of home value) up front and 1.25% (of outstanding loan balance) ongoing, but effective 10/2/17, MIP rates changed to 2.0% up front and 0.5% ongoing
  • MIP’s held in MMI Fund whose solvency has recently become a concern
  • 2016 valuation (performed by IFE) showed a long term $7.8 billion deficit, while 2017 valuation, (performed by Pinnacle Associates) showed a deficit of $14.2 billion

Actuary Peter Neuwirth

The Pinnacle Valuation of MMI Fund solvency

  • Major focus of Pinnacle analysis was on evaluating short-term risks and funding shortfall associated with current portfolio
  • Closed group valuation focuses on status of existing

HECM’s and incorporates pre 2017 MIP structure

  • Includes detailed review of home price volatility, borrower “default” experience (e.g. via failure to pay property tax) and the transaction costs associated with a forced sale
  • Current borrower profile and behavioral assumptions (e.g. HECM drawdown timing and likelihood of property tax/insurance default) seem inconsistent with likely market/demographic trends

Barry H. Sacks

Outline of Current Research Project

  • Built new model to test adequacy of the current MIP structure to fund the promised HUD/FHA guarantees and potentially eliminate existing MMI Fund deficit
  • Utilizes long term (retirement) actuarial principles and is designed to perform an Open Group valuation
  • Can highlight impact of new MIP rates, possible changes in borrower profile and broader use of alternative LOC drawdown strategies (e.g. the “coordinated strategy”)
  • Basic model has been constructed and tested on publicly available data on HECM’s initiated 1989-2011
  • Preliminary findings indicate reasons to be optimistic about the future solvency of the MMI Fund
    Preliminary Findings
  • Analysis of 158,000 HECM’s that terminated between 2005 and 2011 indicate that such terminations would have produced a net gain for MMI Fund had new MIP rates been in effect when HECM’s initiated
  • Significant differences in potential claims found by size of HECM (higher HECM values produced lower claims)
  • Potentially longer duration of HECM and lower property tax/insurance default rates (if borrower profile changes as expected) suggest future HECM’s will produce a surplus for the MMI Fund
  • If future HECM’s produce surplus and HECM volume grows significantly then projected deficit of MMI Fund will potentially disappear