Despite noted improvements in the financial standing of the Home Equity Conversion Mortgage (HECM) book of business in recent years, losses in that portion of the Mutual Mortgage Insurance (MMI) Fund continue to “undermine” the fund’s stability, exposing “weaknesses” in the U.S. Department of Housing and Urban Development (HUD)’s internal control mechanisms.

These are just some of the conclusions about the HECM program drawn by HUD’s Agency Finance Report for Fiscal Year 2020, compiled by HUD Chief Financial Officer (CFO) Irv Dennis and the HUD Office of the Inspector General (OIG), released on Wednesday.

The report, which HUD says helps to emphasize the “enhanced financial controls” under the leadership of Secretary Ben Carson and Dennis, casts the HECM program as an ongoing “major challenge” for the Department which will require additional action in 2021.

Reverse program ‘continues to be subsidized’ by forward

Echoing longstanding criticisms leveled against the HECM program by some observers and government officials, an FHA-sponsored reverse mortgage program that continues to benefit from the performance of the forward mortgage book of business is described in a portion of the report compiled by the OIG, which is designed to point out management challenges for the Department in 2021.

“In HUD’s 2019 Annual Report to Congress, HUD reported on the financial status of the MMI Fund, listing the net worth of its HECM portfolio at negative $5.92 billion,” the report reads. “As in previous years, the HECM portfolio continues to be subsidized by the positive performance of the forward (single-family programs) portfolio with a negative 9.22% capital ratio in fiscal year 2019. HECM claims paid by the MMI Fund on assigned reverse mortgages were $9.56 billion for fiscal year 2019, an increase from the $6.15 billion reported in fiscal year 2018.”

Causes for these cited issues extend from “HUD’s internal control weaknesses,” the report explains, with HECM loan defaults stemming from a lack of borrowers meeting occupancy requirements or fulfilling their tax and/or insurance obligations, the report says.

“Since 2015, FHA has allowed HECM servicers to put borrowers with outstanding property charges into repayment plans as a way to help prevent foreclosures,” the report describes. “However, as of the end of fiscal year 2018, only 22% of these borrowers had received this option. FHA’s control weaknesses associated with HECM borrowers not meeting occupancy requirements have been reported by OIG audits in fiscal years 2012, 2014, and 2015.”

The new report also liberally cites a 2019 Government Accountability Office (GAO) report covering the HECM program, including in its assertion that monitoring deficiencies lead to a lack of assurance that federal requirements are being met on the servicing side.

“FHA officials said that they planned to resume the reviews of servicers in fiscal year 2020; however, as of July 2020, FHA had not finalized the process of developing and implementing procedures for conducting onsite reviews of HECM servicers, including a risk-rating system for prioritizing and determining the frequency of reviews,” the report says.

Avoiding scams, and holding HECM lenders accountable

The report also acknowledges that the HECM product category has become more attractive for seniors in need of additional cash flow in retirement, particularly due to the ongoing economic impacts of the COVID-19 coronavirus pandemic. That additional interest from seniors is plainly visible in both increased HECM loan volume, and in the publication of a HUD Office of the Inspector General (OIG) bulletin warning potential reverse mortgage borrowers of the potential for scams targeting seniors.

To keep the HECM program and the MMI Fund stable, a more robust effort on the part of HUD to ensure compliance by reverse mortgage lenders is necessary, the report says.

“HUD must strengthen its effort to ensure that the lenders participating in the HECM program comply with its regulatory and administrative requirements and minimize claim costs,” the report reads. “From the onset of underwriting to the timing of a claim, if HECM requirements are not properly observed by lenders or strictly enforced by HUD, the MMI Fund would be adversely affected due to the potential risk of improper payments to lenders.”

The report also cites various actions that have been taken by HUD in collaboration with both its OIG as well as the U.S. Department of Justice (DOJ), including the citation of lenders the entities believe to be in violation of certain federal rules and guidelines.

However, the two primary instances it cites in terms of DOJ citations were both directed at either predecessor entities to current lenders, or for alleged activity on loans that occurred over a decade ago. This was well before current program refinements such as Financial Assessment, the second appraisal rule or principal limit factor (PLF) reductions were implemented.

“HUD has collaborated with OIG to take action against lenders who violate program requirements to recapture funds paid as a result of false claims and prevent future losses,” the report reads. “For instance, the U.S. Department of Justice announced in March 2020 that one HECM lender agreed to pay a $2.47 million settlement to resolve allegations of a False Claims Act violation after knowingly originating and underwriting hundreds of FHA-insured HECM loans that did not meet HUD requirements.”

This settlement was directed at Urban Financial Group, the predecessor entity to Finance of America Reverse (FAR) for origination practices dating back to 2010. The report also cites a September, 2020 complaint issued by the DOJ against Nutter Home Loans, alleging forged certifications on HUD documents and the use of unqualified underwriters to approve HECM loans between 2008-2010. Nutter has denied the assertions of the complaint and intends to challenge them in court.

Touting financial management

Secretary Carson and CFO Dennis described a HUD that was financially mismanaged under the previous presidential administration, and that the efforts of their leadership have helped to put the Department on a more stable financial footing.

“When an institution becomes insulated from the success or failure of its policies, it loses its incentive to operate efficiently,” Carson said in a statement. “Private businesses, while engaged in different work than the federal government, do not have the luxury of being protected from their failures or maintaining damaging courses of action. Irv Dennis was able to accomplish the impossible task of providing the financial stability that had gone left unchecked for so many years.”

Responsible financial management of the Department is essential in order for it to fulfill its mission, Dennis added.

“Millions of people across the nation rely on HUD to keep a roof over their head so when the Department’s financial controls are left without proper oversight, it really can have a tremendously negative impact on our country’s most vulnerable citizens,” he said. “So for me, this job is personal, not political.”

Recent data, the ‘subsidy’ point

Likely due to the timing of this report’s composition, it makes no mention of FHA’s most recent report to Congress published last month. That report described an improvement in the financial standing of the MMI Fund’s HECM portion, with the negative value over the past year having been almost entirely diminished to sit at approximately -$500 million compared with the -$5.92 billion figure recorded in 2019. This marked a second consecutive annual improvement in the HECM portfolio, though FHA continues to see a need for action to be taken to create further stability in the HECM book.

Recently, reverse mortgage industry analysts at New View Advisors published a blog entry that disagreed with the notion that the forward mortgage portfolio was subsidizing the reverse mortgage book.

“[A] subsidy would mean outsized realized HECM losses, and a compelling case that this will continue,” New View explained in its post. “This is not demonstrated in the report. In fact, given current trends, a reversal of fortune is possible, in which the HECM program returns to surplus and forward mortgage enters a deficit.”

Read the FY 2020 HUD Agency Financial Report.