Reverse mortgage book inside MMI Fund continues to evolve
The report on the Home Equity Conversion Mortgage (HECM) book of business inside the Mutual Mortgage Insurance (MMI) Fund served as another positive development for the program. The estimated economic net worth of the HECM MMI stood at $17.4 million, up from $15.4 million last year, according to the Federal Housing Administration (FHA)’s Annual Report to Congress released last month.
The cash-flow net present value (NPV) of the HECM book also increased during the year, going from $6.742 billion in 2023 to $8.399 billion in 2024. Details of the actuarial review of the HECM book of business, independently conducted by IT Data Consulting LLC, goes into detail about what drove the reported value changes to the HECM book.
Cash-flow changes
As noted in reports from prior years, there is no single underlying factor that led to changes in the HECM portfolio’s cash flow over the past year. The report explains that the economic models are consistently updated to reflect evolutions in economic assumptions and wider performance realities of the U.S. economy, including those from the White House Office of Management and Budget (OMB).
There are five key factors that help determine the projected economic net worth of the HECM portfolio. These include home-price appreciation, expected interest rates, termination rates, cash drawdown rates and home sale price discounts.
“The sale price of the houses underlying HECM loans tends to be lower than the market price of otherwise identical houses, due to borrowers’ failure to maintain their home adequately and expedited sale of the house after borrowers’ death or relocation,” the report stated. “A deeper discount in the sale price would negatively impact the economic net worth of the Fund.”
These drivers will help determine the course of the HECM book of business in the years to come, the report explained. The HECM portfolio is more sensitive to home price appreciation in particular, and the actuarial review projects that the next few years will continue to see growth in this metric before it begins to taper off.
This “gives higher [house price index (HPI)] projections than the FY 2023 [presidential economic assumptions (PEA)],” the report detailed. “At the same time the PEA for FY 2025 projects higher levels and different shapes of the 1-year CMT rates, 10-year CMT rates, and SOFR rates. 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 endorsed 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 inception of the program, the HECM has once again “been the largest reverse mortgage product in the U.S. market, representing most reverse mortgages.”
Despite a prevalence of fixed-rate HECMs originated in the immediate aftermath of the financial crisis of the late 2000s, their stature in the program has diminished significantly in favor of adjustable-rate options. By 2014, fixed-rate loans dropped to less than 20% of all HECM endorsements, and by the end of 2020, this figure dropped below 2%. Fixed-rate HECMs rallied somewhat in 2021 and 2022, but this was short-lived because of the broader reality for the entire mortgage industry.
“Interest rates significantly increased in 2023 and persisted in 2024, which led to a significant drop in fixed rate loans to 0.9% in 2023 and about 0.2% in 2024,” the report stated.
Despite a concerted effort by parts of the reverse mortgage industry to increase the share of HECM for Purchase loans — and despite the fierce dedication that certain reverse originators have for the product — the market share for this loan type does not warrant being broken out, the authors of the report stated.
“This program allows seniors to purchase a new principal residence and obtain a reverse mortgage with a single transaction,” the report said. “However, these HECM for Purchase loans have been a small percentage of HECM endorsements each year […]. In our analysis, the traditional and for-purchase HECMs are treated the same, as the volume of for-purchase HECMs is small.”
Looking ahead
As it did last year, the report notes that a multitude of factors have the ability to impact the performance of the HECM book in years to come. The trajectory of the HECM program is prone to impacts from regulatory updates, an evolving demographic outlook, changes in economic conditions and/or consumer preferences, and factors that remain difficult to predict — including interest rates and home price appreciation.
Additionally, the demographic realities of an aging population continue to dictate the potential of the HECM program specifically and the reverse mortgage industry at large. This is particularly true when it comes to the retirement practices, care needs and financial conditions for older market participants.
Annual increases in the HECM limit could also impact the trajectory of the program. The HECM limit, calculated at 150% of the conforming loan limits on mortgages backed by Fannie Mae and Freddie Mac, will rise to $1,209,750 in 2025.
“The continuation of the higher loan limit might attract current borrowers to refinance their current HECM to get access to home equity,” the report stated. “As a result, the actual loan termination rates might be different from the estimate presented in this review.”