The U.S. Department of Housing and Urban Development (HUD) Office of the Inspector General (OIG) released a new report detailing what it says are the top management challenges for the department in fiscal year 2025 while also highlighting elements of progress made since the release of a prior report.
The new report echoes some of the concerns presented by the OIG in a similar report released nearly a year ago. These include the characterization of the Home Equity Conversion Mortgage (HECM) program’s and the HECM-backed Securities (HMBS) portfolio’s collective potential to pose a “unique” level of risk for Ginnie Mae on a counterparty basis.
Much of the concern stems from the potential for an additional event that could require Ginnie Mae to assume control of another reverse mortgage lender’s portfolio. Its assumption of a portfolio formerly belonging to a leading lender that went bankrupt has caused significant strain on Ginnie Mae’s resources.
‘Unique risk’
“HUD plays a critical role in every American community, whether through creating homeownership opportunities, creating liquidity in the housing market, or providing billions of dollars for rental assistance, homelessness assistance, and disaster recovery,” HUD Inspector General Rae Oliver Davis said in a statement.
“This report reflects the most pressing challenges that HUD faces as it strives to achieve its mission. I look forward to continuing to use our oversight to improve how HUD programs and operations deliver for the American people.”
The report features a dedicated HECM section under a broader heading of “mitigating counterparty risks.” It states that the HMBS portfolio presents a “unique risk” for Ginnie Mae particularly as interest rates remain elevated.
“HECM originations are much more affected by higher interest rates because higher interest rates decrease the funds available to the borrower through a HECM loan,” the report explained. “In addition, issuers must buy HECM loans out of their HMBS pools when the borrower has exhausted the amount of funding available under the loan, regardless of whether the borrower is paying off the loan.”
Buyouts, which can be costly to lenders, require HMBS issuers to advance the full balance of the loan prior to assignment to HUD. As interest rate relief did not materialize for the majority of the year — and as rates have gone up recently despite a lower federal funds rate — that risk remains.
“In a market with increasing or sustained high-level interest rates, the cost of financing to fund these advances becomes increasingly expensive,” the report said. “At the same time, increasing rates may result in decreased new originations and refinances, which are significant sources of lender income.”
HMBS issuance is a key reverse mortgage industry performance metric, and the overall pool of issuers has fallen due to lenders going out of business, exiting the space voluntarily or acquisition deals that combine two issuers into one. Issuance also remains at historically low levels following the spike in interest rates that occurred after the COVID-19 pandemic.
“Ginnie Mae’s active issuer HMBS portfolio is concentrated among a small group of nondepository financial institutions, with the top 10 MBS issuers being nonbanks,” the report said. “Higher levels of concentration of HMBS issuance, access to financing, and availability of subservicers all increase the complexity of Ginnie Mae’s monitoring, oversight, and enforcement.”
RMF portfolio assumption
Top-five industry lender Reverse Mortgage Funding (RMF) collapsed at the end of 2022, leading Ginnie Mae to assume control of its HMBS portfolio in December of that year after the company failed to sell its portfolio to another issuer. At the time, the portfolio represented 36% of all HECM loans, and the assumption of servicing responsibilities was unprecedented. This adds to the complexity of the moment, the report explained.
“This was the first time in Ginnie Mae’s history that it had extinguished an issuer with an HMBS portfolio,” the report noted. “Ginnie Mae subcontracted with a master subservicer, which RMF had also used, to administer the portfolio. Having the existing vendor relationship supported minimal disruption to the borrower and ensured Ginnie Mae’s ability to service HECM loans.”
But managing the portfolio is a time-intensive process for Ginnie Mae personnel, the report noted. The company began handling both scheduled and unscheduled draw requests from borrowers, mortgage insurance premium (MIP) payments, mandatory 98% of maximum claim amount (MCA) repurchases, and investor pass-through payments. As of September 2023, these totaled more than $1.6 billion.
The HMBS portfolio size of $57.9 billion is small relative to the full $2.6 trillion portfolio that Ginnie Mae manages. But this does not diminish the time-intensiveness and attention to detail required for proper management of the portfolio, the report noted.
“Periods of rising interest rates have challenged HMBS issuers,” the report said. “This condition is especially concerning since the four largest issuers have approximately 86% of the remaining HMBS market. Although Ginnie Mae implemented several policy changes designed to help issuers navigate liquidity challenges, assumption of another defaulted HMBS portfolio could significantly challenge Ginnie Mae’s capacity.”
HMBS 2.0
The report does not mention the forthcoming policy known as “HMBS 2.0,” which would include a reduction in the HMBS pool size to 95% of the loan’s total unpaid principal balance (UPB). This move is designed to “create an additional economic incentive to protect Ginnie Mae and taxpayers against a decline in collateral value,” the company explained when it released an initial HMBS 2.0 term sheet earlier this year.
The new program will also permit various property valuation methodologies, including automated valuation models (AVMs) from approved vendors or an independent broker’s price opinion, but it factors these into the pool at 90% of valuation.
This is designed to “protect Ginnie Mae in the event of a variance between the estimated property value and the market value or a future decline in house prices,” according to an informational blog authored by Ginnie Mae senior policy adviser Karan Kaul.
Reverse mortgage industry participants have lauded the development of HMBS 2.0, and the industry’s leading lender even mentioned its potential to improve the liquidity situation for all issuers.
In a recent interview with HousingWire’s Reverse Mortgage Daily (RMD), Ginnie Mae acting president Sam Valverde said that an updated HMBS 2.0 term sheet is expected within the next several weeks. But he declined to offer an implementation timeline for the planned policy.
It may also be obfuscated by the upcoming general election, where the next president may be charged with implementing such policies should the timeline extend beyond the end of President Joe Biden’s term on Jan. 20, 2025. There’s no guarantee that current leaders installed by the Biden administration will remain in their posts following the next presidential inauguration.
Over the last year some of us have been concerned about two Top 10 lenders in particular surviving as “going concerns.” One of those was FOA.
As is generally known in the industry, FOA took a measured and reasonable risk by completing a 10 to 1 reverse stock split. That action resulted in a meaningful step in the right direction at least as it concerned a proposed removal of its stock from the NYSE. The action went surprisingly well. Congratulations to the Board and senior mangement at FOA.
But a very serious issue still remains, high debt. Some think HMBS 2.0 will go a long way to cure this FOA problem. That seems unlikely unless HMBS 2.0 can result in an actual sale of the underlying HECMs to the entity acquiring the proposed new class of HMBS but if that was true, why have a new class of HMBS? Besides it seems as if the profit to be generated from the acquired HECMs could lead to improved cash flows, slowly leading to a better debt picture.
Since the other lender of concern is not a publicly traded entity, much less is known about their financial situation. Although much specualtion is going on, such speculation can end up being self-fulfilling and counter productive.
Let us hope that we see less portfolio acquisition decisions of the type made by RMF in the future. Some believe that the RMF “AAG portfolio decision” was made long before due diligence had reached its independent decision while others believe that the work of the due diligence team was inadequate and most likely done incompetently based on RMF’s management rather quick decision to declare bankruptcy once the “AAG portfolio” was acquired. Yet it may be neither of these two reasons. No matter what, portfolio acquisition decisions of this magnitude should be done only after a thorough, adequate, and competent due diligence has been performed and senior management has carefully reviewed the work of the due diligence team and carefully considered its recommendation and those of its financial management team.
Let us hope we do not see another RMF management failure of this magnitude again in this minor and “boutique” industry for at least a few decades, if ever again in our life times.