The report on the Home Equity Conversion Mortgage (HECM) activities within the Mutual Mortgage Insurance (MMI) Fund was another positive development for the program. The estimated net economic value of the HECM MMI was $17.4 million, compared to $15.4 million last year, according to the Federal Housing Administration (FHA)’s annual report to Congress was released last month.
The HECM book’s cash flow net present value (NPV) also increased over the year, from $6.742 billion in 2023 to $8.399 billion in 2024. Details of the actuarial assessment of the HECM Book of Business, independently conducted by IT Data Consulting LLCdiscusses in detail the cause of the reported value changes in the HECM book.
Changes in cash flow
As noted in previous year’s reports, there is no single underlying factor that has led to changes in the HECM portfolio’s cash flow over the past year. The report explains that economic models are consistently updated to reflect developments in economic assumptions and the broader performance realities of the U.S. economy, including those from the U.S. economy. White House Office of Management and Budget (OMB).
There are five key factors that help determine the expected net economic value of the HECM portfolio. These include home price appreciation, expected interest rates, termination rates, cash withdrawal rates, and home sales price discounts.
“The sales price of the homes underlying HECM loans is typically lower than the market price of otherwise identical homes because borrowers fail to adequately maintain their homes and sell the home after the death or move of the borrower accelerated,” the report said. . “A deeper discount to the sales price would have a negative impact on the economic net value of the Fund.”
These drivers will help determine the direction of the HECM business in the coming years, the report said. The HECM portfolio is notably more sensitive to home price growth, and the actuarial review expects the coming years to continue to see growth in this metric before it begins to taper off.
This “gives higher [house price index (HPI)] projections beyond fiscal year 2023 [presidential economic assumptions (PEA)]”, as stated in the report. “At the same time, the PEA forecasts higher levels and different forms of the 1-year CMT rate, 10-year CMT rate and SOFR rate for fiscal year 2025. Updating these economic assumptions leads to the [net present value (NPV)] increase by $4.779 billion, from $6.290 billion to $11.069 billion.”
Status of the HECM book
The FHA approved 26,429 HECM loans in fiscal year 2024, with a total maximum claim amount (MCA) of $13.323 billion. As has been the case since the program’s inception, the HECM has once again been “the largest reverse mortgage product in the U.S. market, representing the majority of reverse mortgages.”
Despite the fact that fixed-rate HECMs originated in the immediate aftermath of the late 2000s financial crisis, their status in the program has significantly diminished in favor of variable-rate options. By 2014, the number of fixed-rate loans had fallen to less than 20% of all HECM recommendations, and by the end of 2020 this figure had fallen to below 2%. Fixed rate HECMs saw a slight increase in 2021 and 2022, but this was short-lived due to the broader reality for the entire mortgage industry.
“Interest rates rose significantly in 2023 and continued into 2024, leading to a significant decline in fixed rate loans to 0.9% in 2023 and approximately 0.2% in 2024,” the report said.
Despite a concerted effort by parts of the reverse mortgage industry to increase the share of HECM for purchase loans – and despite the fierce commitment that certain reverse originators have to the product – the market share for this type of loan does not justify breaking it out. authors of the report stated.
“This program allows seniors to purchase a new primary home and obtain a reverse mortgage in a single transaction,” the report said. “However, these HECM for Purchase loans represent a small percentage of HECM recommendations each year […]. In our analysis, traditional HECMs and pre-purchase HECMs are treated the same because the volume of pre-purchase HECMs is small.”
Looking ahead
Like last year, the report notes that a host of factors could impact the HECM book’s performance in the coming years. The trajectory of the HECM program is sensitive to the impact of regulatory changes, evolving demographic prospects, changes in economic conditions and/or consumer preferences, and factors that remain difficult to predict – including interest rates and home price growth.
Furthermore, the demographic realities of an aging population continue to shape the potential of the HECM program in particular and the reverse mortgage industry in general. This is particularly true when it comes to the pension practice, healthcare needs and financial circumstances of older market participants.
Annual increases in the HECM limit could also impact the program’s trajectory. The HECM limit, calculated at 150% of the conforming loan limits for mortgages backed by Fannie Mae And Freddie Macwill rise to $1,209,750 by 2025.
“The continuation of the higher borrowing limit could prompt current borrowers to refinance their current HECM to access home equity,” the report said. “As a result, actual loan termination rates may differ from the estimate presented in this summary.”
