Dr. Ben Carson
Secretary of Housing and Urban Development
Urban Institute Housing Policy Center Remarks
Washington, D.C., Urban Institute Headquarters, April 10, 2019
As prepared for delivery. The speaker may add or subtract comments during his presentation.
Thank you, Laurie. And thank you to the Urban Institute for hosting this forum, as well as to the many industry experts in attendance for your thought leadership on the issues facing America’s aging population.
At HUD, our mission is to ensure all Americans have access to safe, quality, and affordable housing. Fulfilling this mission means delivering housing solutions that combine compassionate care from administrators with responsible restraint from regulators.
In few areas is this balance so delicate – and yet so critical to maintain – as in the matter of caring for our nation’s senior population.
This afternoon, I’d like to share HUD’s vision for addressing the housing and financial challenges of providing for those of advanced age, while also protecting the American taxpayer. In particular, I will be focusing on HUD’s innovative and holistic reforms to the FHA’s Home Equity Conversion Mortgage Program – or "HECM", and how we are stabilizing the Mutual Mortgage Insurance – or "MMI" – Fund that supports the FHA’s vital operations.
TV commercials often promote "reverse mortgages" as a safe and reliable product to supplement the incomes of senior homeowners who want to remain in their homes as they age. HUD calls this choice "Aging In Place", and HECM is a popular program that helps qualified seniors borrow on the home equity they’ve built up over the years. Since HECM’s inception, FHA has insured more than one million reverse mortgages for senior borrowers.
However, due to the uncertainty of home prices, interest rates, and other factors, the HECM Program has been historically volatile. After HECM’s popularity increased in the wake of the 2008 housing crisis, federal regulators came to a crossroads: either we could limit the program – and therefore restrain access to reverse mortgages for tomorrow’s seniors – or we needed to put HECM on firmer financial footing.
Quite simply, the HECM Program is losing money. Since 2009, FHA-insured reverse mortgages have drained $14.5 billion dollars from FHA’s reserves. Today, younger homeowners with traditional FHA-insured "forward mortgages" are routinely bailing out the reverse mortgage program. We can no longer tolerate putting American taxpayers – and future generations of seniors – at risk.
Fortunately, HUD answered the call, and in the past two years we’ve made much-needed changes to the issuance of new HECM loans. These changes do not affect the terms of any existing reverse mortgage, so the nearly 640,000 seniors that currently have a reverse mortgage will not be impacted.
HUD has undertaken at least five significant reforms to put the HECM Program – and the MMI Fund by extension – on a more fiscally sustainable path.
First, we implemented new policies to improve the servicing of HECM loans. These policies address defaults associated with unpaid property charges, facilitate property sales of due and payable loans, and provide incentives to reduce lag time in conveying eligible properties to FHA.
Second, we have adjusted Mortgage Insurance Premiums, or "MIPs". Specifically, we implemented an initial MIP of two percent of the Maximum Claim Amount for loans, revised from the prior schedule that charged borrowers either 0.50 percent or 2.50 percent, depending on how much of their available principal limit borrowers drew at closing. The new upfront premiums recognize that all borrowers taking out a HECM loan – regardless of how much they draw upfront – represent potential risk and should contribute to the fiscal health of new business. The new annual MIP is 0.50 percent of the outstanding mortgage balance, reduced from 1.25 percent for the prior schedule. This change provides fee relief for all borrowers in the program and preserves more equity for borrowers over time by slowing the rate at which the loan balance grows.
Third, HUD updated the amount seniors can draw under the Principal Limit Factors, or "PLFs". Under a revised schedule, new PLFs preserve homeowners’ equity in the home if they continue to occupy the house for the expected life of the loan. In addition to preserving more equity in the home for seniors, a somewhat larger equity cushion upfront helps mitigate losses to the MMI Fund.
The MMI Fund exists to buffer taxpayers from losses, and when you deplete it, you run the risk of a bailout. HUD’s role is to help vulnerable families and those most in need – not to risk financial susceptibility and enter a position of need itself.
It is important to remember that, the FHA has helped millions of families buy their first home, playing a pivotal role in creating the American Dream we know today. If, however, we hope to sustain the FHA for another 85 years, we must make certain its lending standards position borrowers for successful ownership, and that its MMI Fund has sufficient reserves to weather any future storms.
HUD’s fourth reform to the HECM program was to impose a new appraisal rule, whereby reverse mortgage lenders cannot close HECM-insured loans unless they submit a property value appraisal and receive FHA approval in advance. This was significant change in HUD policy, but an essential one.
Under our new requirements, FHA will require a second appraisal be conducted whenever a collateral risk assessment of the initial appraisal determines additional support for the collateral value is required. This reform was put in place to deal with the issue of appraisal bias – a significant driver of the program’s historical losses.
Using a variety of collateral validation tools, HUD confirmed that HECM properties experience significant appraisal inflation. While appraisal inflation has decreased over time since the housing crisis of 2008, it has not been eliminated. Indeed, appraisal inflation directly correlates with increased loss severity and increases the probability that a claim is more likely to occur.
Accurate appraisals are fundamental to determining the appropriateness of a HECM loan. Because reverse mortgages under HECM have no recourse to the senior’s income or assets, only the value of the property is available as collateral. So if FHA insures a loan with an inflated collateral value, it suffers outsized losses in the event of a default.
Although we believe market practices have improved meaningfully since the financial crisis, HUD is being proactive about addressing appraisal bias, and using innovative reforms to pave the way forward.
As stewards of the public trust, we must be vigilant not to burden Millennial and other borrowers financed by the FHA’s forward mortgage program, which is performing very well thanks to a strong economy, solid housing market, and smart portfolio management. The positive performance of the FHA’s forward book – with a 3.93 percent stand-alone capital ratio and over $46 billion in economic net worth – stands in stark contrast to the HECM portfolio, which ended the year with a negative 18.83 percent capital ratio and a negative economic net worth of over $13 billion.
We have taken several steps to improve the performance of the FHA’s 2019 HECM book and future HECM books of business, and preliminary indicators suggest these changes will have positive effects. Nevertheless, we will continue to monitor our results and make changes wherever necessary to make sure HECM remains an option for seniors aging in place.
Fifth, and finally, HUD is assessing organizational and policy changes to meet a recent Presidential directive on housing finance reform. In today’s budget climate, we have to think differently about how we operate federal programs and administer services, especially when we have evidence that the old school approach is no longer sustainable. While funding for HUD has increased over the last twenty years, the number of households served has remained the same.
That is why a White House memo directed HUD to develop plans that update programs at HUD, FHA, and Ginnie Mae.
In particular, the White House instructed FHA and Ginnie Mae to assume primary responsibility for housing support to low- and moderate-income families that cannot be fulfilled through traditional underwriting. These activities must be accomplished while reducing taxpayer exposure through improved risk management, program and product design, and modernizing the operations and technology of FHA and Ginnie Mae.
In the HUD directive, the President asked for HUD’s plan to include proposals that achieve the following six objectives:
- Addressing the financial viability of the HECM program;
- Assessing the risks and benefits associated with providing assistance to first-time homebuyers, including down-payment assistance;
- Defining the appropriate role of the FHA in multifamily mortgage finance;
- Diversifying FHA lenders through increased participation by registered depository institutions;
- Enhancing the Ginnie Mae program participation requirements and standards to ensure its safety and soundness and to protect borrower and investor interests; and
- Reducing abusive and unsound loan origination or servicing practices for loans in the Ginnie Mae program, including, if appropriate, by providing for cooperation with other loan program sponsors and regulators.
These are meaningful reforms that will both directly and indirectly enhance long-term stability to federal entitlement programs, especially as future generations of seniors approach retirement.
In conclusion, only by implementing responsible reforms can we carry out the compassionate care for American homeowners that is etched into our mission statement at HUD.
Delivering smart, effective housing policy solutions is not only a way to pay back our nation’s grandmothers and grandfathers, who passed the torch of liberty on to the next generation – it is necessary to pay forward a brighter future for the millions of children and grandchildren who support America’s tax base, raise families of their own, and will one day face the challenges of retirement and aging in place first-hand.
I am grateful to the Urban Institute for your leadership and policy analysis, and look forward to your continued insights as we work to sustain the economic vitality of all seniors – and all American citizens – who call this great nation home.
Thank you for joining me this afternoon, and God bless.