FHA reverse mortgages are flawed and need fixingby Peter Miller
Earlier this month, Moody’s Investors Service downgraded $5 billion of Home Equity Conversion Mortgage (HECM) bonds, a ratings change which ought to catch the attention of someone at HUD.
While the FHA mortgage program has been doing better in general, the situation with reverse mortgages is very different–claims for HECMs are up 64.6 percent.
When the market is down, HECMs don’t perform
The HECM reverse mortgage program continue to be a drain on the FHA because the entire concept does not work in extended down markets for three reasons:
- The typical FHA reverse mortgage is outstanding six years
- U.S. home prices peaked in April 2007 and have declined nationwide since then
- Reverse mortgages are a loan product that produces negative amortization–the final debt is larger than the original loan amount
FHA: 100 percent responsible
While reverse mortgage balances are growing, home values are falling. If the loan is outstanding long enough, the result is that the home cannot be sold for as much as the debt. The FHA, which has insured the loan, is 100 percent responsible for any and all loss.
There are solutions to reduce risk
There are several solutions which could resolve the reverse mortgage losses which HUD will face in the future (it’s too late to avoid the losses from past loans):
- Discontinue the program: The most obvious step would be to do what private companies do when they have a product or service that’s not selling: they discontinue it. Indeed, many large lenders have withdrawn from the reverse mortgage marketplace and it would make sense for HUD to consider the same option.
- Stop investing in the program: Instead of taking the obvious course, HUD is doubling down. It has just announced that it will spend an additional $4 million on reverse-mortgage counseling, money that will only encourage the origination of more reverse mortgages and thus future claims.
- Make smaller loans: Another idea would be to make future reverse mortgage loans less risky by assuring that the loan sizes are smaller. The way to do this is to require more owner equity. With lower loan-to-value ratios, HUD would have more protection in the event of a reverse mortgage claim.
- Less lender guarantees: Risk would also be reduced by lowering the guarantees now made to lenders. Lenders today have 100 percent protection against any loss and thus no skin in the game and little reason to decline reverse mortgage business. You can be certain that once lender money was at risk, fewer reverse mortgages would result in claims.
HUD: It’s time to take a closer look
There’s no doubt that the reverse mortgage program is well intended and that it has helped selected borrowers. But HUD has an obligation to protect the FHA program. HUD needs to examine the real results created by reverse mortgages and to thoroughly reconsider the guarantees paid to lenders.
Because we’re in an election year, major changes to the reverse mortgage program are unlikely in 2012. But surely someone at HUD is looking at the numbers and wondering why the FHA continues to guarantee a loan product with inherent flaws.