When is the best time to get a reverse mortgage?

If you need such financing you might want to think about closing on a reverse mortgage before December 31st. The reason? The FHA reverse mortgage program, what HUD calls home equity conversion mortgages or HECMs, has got big problems and changes are likely.

To understand what’s going on you have to go back to last May when HUD Secretary Shaun Donovan asked Congress for $800 million to support the reverse mortgage program.

The money is needed because reverse mortgages are attractive to insurance programs such as the FHA when home values are rising. However, when values are declining then reverse mortgages are a trap for insurers, a costly one.

With a “forward” mortgage you make payments each month and with traditional loans the size of the debt is reduced over time. With a reverse mortgage there are no monthly payments so the loan balance grows as unpaid interest is added to the debt.

If home values are going up then when a reverse mortgage borrower moves, sells or passes away the property is sold and the debt is paid off. However, if home prices are falling then there can be insufficient equity in the home to pay off the debt and the insurer must step in to pay off lender losses. The FHA, of course, is the insurer for virtually all reverse mortgages at this point.

HUD reports that the average HECM lasts about six years. About a quarter of all FHA-insured reverse mortgages (23 percent) last only three years. Combine typical reverse mortgage terms with declining market values and you can see what’s happening: HUD is getting stuck with a very large number of claims.

What do insurance companies do when they have losses? The reduce coverage or stop coverage altogether. HUD, being a government entity, has asked Congress to support the program with big dollars, that $800 million.

The government, however, is upside down, it’s spending more than it has, something which has been going on since the last Clinton Administration (Clinton had four annual surpluses in a row during his last term). Given that the feds have no extra dollars, the HUD request has been met with a shrug. In fact, an appropriations bill passed by the House actually required HUD to operate the HECM program on a net zero subsidy rate, a fancy term meaning no money from Uncle Sam. The net zero language was dropped in a Senate version of the bill, but now the question is what subsidy — if any — will be created when the legislation is finalized.

Logically, HUD can cut program costs by reducing the size of the reverse mortgage loan limit for the HECMs it insures, it can limit the size of the program to fewer loans or — in the extreme — it can end the program.

What will HUD do? What will Congress do? No one knows. What we do know is this: Current reverse mortgage loan limits are now scheduled to continue until December 31st but the government’s new fiscal year begins October 1st. Since an end to the program seems unlikely for political reasons, a more reasonable way to reduce HUD losses would be to lower loan limits at the start of the new year.

For details and specifics, please speak with reverse mortgage lenders.

This entry was posted on Monday, September 14th, 2009 at 7:14 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.