Reverse Mortgages Not Ready For Reform

The FHA Reform Act of 2010 went through the House last week with a vote of 406 to 4, but you can read the document from end to end and not see one direct reference to reverse mortgages insured by the FHA.

This seems like an odd omission given that the government’s reverse mortgage product — the home equity conversion mortgage (HECM) — is probably the best FHA candidate for new standards and requirements.

If you’re a borrower the current HUD reverse mortgage standards are just dandy, but if you’re writing claim checks you might have a different view. Here’s why:

• In May 2009 HUD was asking Congress for an $800 million appropriation to support the HECM program.
• In September 2009 HUD tightened HECM standards to reduce the loan amounts available to borrowers and cut risk.
• By March of this year the requested level of help had fallen to $250 million — good, but not great.

The Problem

Why does HUD still need money to support reverse mortgages? After all, its forward loan program is doing well in tough times, in fact HUD expects to take in $6 billion in profits next year on forward loans.

But with reverse mortgages the reality is a little different. A study by HUD’s Office of Policy Development and Research found that the typical HECM was outstanding about six years. Unfortunately, about 23 percent of all HECMs end within three years.

Here’s the problem? HUD reverse mortgages are backed by, well, HUD. If a lender has a loss on a loan then HUD will face an insurance claim. Since borrowers typically are not making monthly payments for principal or interest during the loan term, reverse loan balances grow over time. The result is that with reverse mortgages you typically have no amortization. You have expanding loan balances at the very time when home values are going down — meaning bigger potential claims against HUD then if housing prices were rising.

This is a big deal because the government reports that in February home prices were 13.3 percent below their peak in April 2007 — about three years ago. In a number of states, of course, prices have fallen much further.

Good News For Borrowers

If HUD were a private company it would not be insuring reverse mortgages. However, HUD is a governmental entity and the reverse mortgage program reflects a public policy value. In effect, qualified borrowers have an opportunity to get financing which would not be available under normal circumstances.

Given a $200 million request for help, is it possible that HUD will want additional changes in the program? If yes, it means if you need or want a reverse mortgage that it might be a good idea to get one now rather than later. Think of it as a hedge against possible change. What kind of change? A rational insurance company would want higher premiums to protect against losses or a larger equity cushion — meaning only smaller loans would be available.

This entry was posted on Wednesday, June 16th, 2010 at 12:29 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.