Review of MMI Fund’s reverse mortgage book sheds light on evolving HECM

The report on the Home Equity Conversion Mortgage (HECM) book of business inside the Mutual Mortgage Insurance (MMI) Fund was another positive overall development for the program, with the estimated economic net worth of the HECM MMI at $15.368 billion, according to the Federal Housing Administration (FHA) Annual Report to Congress released in November.

The cash-flow net present value (NPV) of the HECM book also increased year over year, from $3.646 billion in 2022 to $6.742 billion in 2023. Details of the actuarial review of the HECM book of business, independently conducted by IT Data Consulting LLC, goes into deeper detail about what drove the added economic value to the HECM book of business.

Change in cash flow

While there was no single factor that led the HECM book’s value to a higher level last year, the reviewers pointed instead to multiple elements that dictated the results.

“The change was driven by many factors, such as differences in the actual performance of the economy versus what was projected and differences in the actual composition of the portfolio versus what was projected,” the report stated.

One impact was tied to the pandemic, the report explained.

“Higher death termination caused by the COVID-19 pandemic was in the data and led to different age composition of the active loan,” the report read. “We leave this to future research to identify the impact of the COVID-19 pandemic on the composition of surviving loans. Excluding the impact of COVID-19 pandemic on termination rates, the forecasted NPV is $6.667 billion, which reduces the actuarial central estimate of $6.742 billion with COVID impact by $0.074 billion.”

Once more, the reviewers point out that FHA endorsed 32,932 HECM loans in fiscal year 2023, with a total maximum claim amount (MCA) of $15.892 billion. Total endorsements between fiscal years 2009 and 2023 were 863,102, a rough estimate of the total number of customers served by the HECM program since the early aftermath of the Great Recession.

Despite a wide variety of disbursement options, the reviewers concluded that the line of credit option on a HECM loan is by far the most popular among borrowers, with 87% of HECM customers choosing the line of credit over other options like a lump-sum or term payment.

The review also reinforced existing product trends, including the relative inactivity of the HECM for Purchase (H4P) product relative to the traditional HECM, as well as the sharp drop-off in HECM-to-HECM refinances that occurred last year following a historic rise in interest rates.

In fact, the reviewers see so few H4P loans that they don’t see a need to distinguish them from traditional HECMs.

“In our analysis, the traditional and for-purchase HECMs are treated the same, as the volume of for-purchase HECMs is small,” the report explained.

Loan amounts and HECM limits

The actuarial report also detailed loan amount information and how these have changed since fiscal year 2009.

“Approximately 65% of loans endorsed in Fiscal Year 2009 had an MCA of less than or equal to $300,000, and this percentage increased to approximately 72% by Fiscal Year 2012,” the report stated. “Since then, the percentage of endorsements less than $300,000 has decreased steadily to approximately 23% for Fiscal Year 2023.”

With higher limits, the loan amounts have been steadily increasing in tandem, the report suggests.

“The percentage of endorsements with an MCA between $300,000 and $417,000 decreased from 17.6% in 2009 to about 12-14% during Fiscal Years 2010 through 2014. In 2023, it has increased to 23.6%. As the principal limit has been increasing, the percentage of endorsements with an MCA over $417,000 has increased steadily since 2012.”

In 2009, the U.S. Department of Housing and Urban Development (HUD) set the HECM limit at $625,500, an increase from $417,000. HUD extended that HECM limit through 2017, at which point it was modestly increased to $636,150.

Since then, increases in the HECM limit have closely tracked those of conforming loan limits, which ultimately led to the limit surpassing $1 million for the first time in 2023. In 2024, the HECM limit stands at $1,149,825, an increase of more than $60,000 compared to the prior year.

The evolving landscape

The overall landscape of the reverse mortgage market is subject to change despite the reviewers’ attention to detail and sound predictions, the report said.

“Regulatory updates, evolving demographics, economic conditions, and consumer preferences, unclear interest rate and house market will contribute to the changing landscape of the HECM market,” the report stated. “Changes in financial markets, retirement needs, and long-term care needs will affect borrowers’ participation in the HECM program, how they use HECM loans, and the innovation in product design. This will affect the loan termination and performance of current loans.”

The addition of nonborrowing spouses younger than 62 in 2014 is one such change that could alter the course of the program. Other examples include the introduction in 2015 of the life-expectancy set aside (LESA) account and the 2017 principal limit factor changes.

Different limits in the future could also change the trajectory of the HECM program and, by extension, the book of business inside the MMI Fund.

“Congress has constantly increased the loan limit every year since 2018,” the report explained. “The continuation of the higher loan limit might attract current borrowers to refinance their current HECM to get access to home equity.”