According to analysis by New View Advisors, a financial services firm dedicated to the reverse mortgage industry, the FHA's HECM mortgage insurance fund currently faces a negative net present value (NPV) estimated at $7.3 billion. The negative analyzes the total MIP collected and compares it to actual realized losses and projected losses from loans originated between 1990-2010.
New View estimates that there are currently about 540,000 HECM loans outstanding with an approximate total outstanding balance of $76 billion. Comparing the current balances of individual loans to home price data they estimate that 93,000 of those loans are currently underwater. This represents about $3.3 billion in outstanding loans or 17.1% of all outstanding loans.
The analysis goes further to predict losses when adding the assumption that disposition costs rise when loan balances exceed the value of the home. When assuming costs of 10% of the value, the number of loans underwater increases to 135,000 or 24.9% of the total and $4.9 billion value. Increasing costs to 15% of value, the number reaches 166,000 loans, 30.6%, a $6.1 billion total.
The vast majority of the underwater HECM loans originated in 2005 to 2008, which corresponds to the home price run up prior to the current recession. The percentage of underwater loans falls within a similar range to forward loans which Core Logic recently estimated to be about 23.1% of all outstanding forward mortgages.
Through 2010, it is estimated that the MIP collected is $4.5 billion. The FHA fund has realized $400 million in losses. Projected losses from loans originated between 1990 to 2008 are $8.7 billion and from 2009 to 2010 at $2.7 billion, for a total of $11.4 billion in projected losses. Subtracting the expected losses from the MIP collected leads to the expected loss of $7.3 billion for loans originated during that period.
Of course, the projected NPV looks at the current status of the MIP fund as of the end of 2010. The fact that the payments of the loans will occur over a staggered period of time, can exacerbate the problem, or mitigate it, depending on the average duration of payoff and the recovery of home values over time. Accruing interest and additional draws will lead to growing loan balances, while home values may be slower to recover. In this scenario, the percentage of loans that lead to insurance losses could increase. On the other hand, if home values are able to reasonably recover before a large number of payoffs (and the loans do not remain outstanding for an extended period of time), these losses could be reduced.
This projected NPV is the primary basis for the reduction in principal limits and the introduction of the HECM Saver. The result of these changes is a surplus for the FHA HECM insurance fund in the Budget for fiscal year 2012. Continued surpluses will help account for the project losses from prior years. More importantly, surpluses provide support that the HECM program is self-sustaining and will be able to cover losses from underwater loans without additional assistance from the federal government. This is a vital statistic in sustaining the viability of the program over the longer term.