Is it time to end FHA reverse mortgages?
by Peter Miller
Following in the steps of Bank of America and Financial Freedom, another huge lender has announced that it will no longer sell reverse mortgages.
Wells Fargo says it’s leaving the reverse mortgage business. It will no longer sell home equity conversion mortgages (HECMs), reverse mortgages sold to those aged 62 and above and insured by the FHA. The company will continue to service current borrowers.
Most of us get “forward” mortgages where the lender puts up cash and we pay monthly for the next 15 or 30 years. With an FHA-insured reverse mortgage, the borrower gets cash but there are no required payments for principal or interest.
Instead, the loan is a negatively-amortizing mortgage with unpaid interest added to the initial debt each month. The loan ends when the borrower moves, sells or dies, at which point the estate can give the property to the lender, sell it to pay off the debt, or keep it and refinance. If the debt is less than the value of the property the FHA insurance covers the unpaid balance. In no case can there be a deficiency judgment against the borrower or the borrower’s estate.
Why did Wells Fargo leave the reverse mortgage business?
One reason cited is the matter of “today’s unpredictable home values.” Why this should be a problem for a lender is unclear, given that HECM lenders are insured against loss by the FHA.
Values, however, are a problem for borrowers. You can’t get 100 percent financing with a reverse mortgage or anything close. As home values have declined, owners have gotten less cash from their properties, perhaps not enough to make a reverse mortgage interesting.
To try to drum up more business, HUD introduced the HECM Saver plan last September. Instead of a 2 percent up-front insurance fee with a regular FHA-backed reverse mortgage, the cost of coverage was reduced to 0.01 percent. The catch was that in exchange for virtually no up-front mortgage fee, the amount a borrower could take out against a home was reduced–thus reducing future claims against the FHA.
Reverse mortgages hold foreclosure risks as well
Wells Fargo also talked about how difficult it was to judge the ability of seniors to “meet the obligations of homeownership and their reverse mortgage, e.g., payment of property taxes and homeowners’ insurance.”
Because a reverse mortgage has no required monthly payments for principal or interest, borrowers are qualified on the basis of the value of their homes. However, borrowers continue to have an obligation to pay property taxes and insurance. If homeowners don’t make those payments, a reverse mortgage with no monthly costs for principal and interest can actually be foreclosed. In fact, last year an audit showed that unknown to HUD, nearly 13,000 HECM borrowers could be facing foreclosure.
The solution to the taxes and insurance problem would be to create required escrow accounts to protect borrowers. However, such accounts would require monthly contributions and that’s precisely what many cash-strapped older borrowers are trying to avoid.
Falling home prices: No good for HECMs
In the end, Wells Fargo points out that “the government’s HECM or reverse mortgage program was designed in a different economic time.” This is precisely right.
Reverse mortgages made a lot of sense when home values were generally rising because negative amortization could be offset with higher prices. That’s a combination that limits and perhaps eliminates lender claims against HUD.
But home values have been falling in most areas of the country since April 2007. Combine negative amortization with falling home values and you have a program which is destined to fail.
Time for HUD to drop the HECM
This is a case where lenders are right. Like Wells Fargo, it’s time for HUD to drop the HECM program. HUD’s own figures show that HECM insurance claims for April were up 76 percent when compared with a year earlier.
There’s no sense issuing new reverse mortgages unless home values are growing. In particular, there’s especially no sense originating fresh HECMs in the five states which are home to more than half of all foreclosures–California, Florida, Michigan, Arizona and Nevada.
The reverse mortgage concept is a good idea in theory, but the theory is just not workable when home values are falling year after year.
