FHA reverse mortgage program could faces changesby Peter Miller
In the next few weeks, we will find out how the FHA’s reverse mortgage program has done in the past year. This is an important benchmark because the reverse mortgage program has lurched along, creating big losses for the FHA and its reserve system.
The FHA fiscal year ends September 30, so we should get the final year-end figures in the next week or two. As of August, claims against the FHA program were generally down 15.5 percent. However, claims with reverse mortgage products were up 43.6 percent. There is little reason to believe that the program will show tremendous improvement in September, the last month of the government’s fiscal year.
Reverse mortgages are a form of financing open to those aged 62 and above. The idea is to use real estate equity to get a loan and then money from the loan can be used for any purpose. The attraction of reverse mortgages is that while the homeowner gets access to cash, there are no monthly costs for principal and interest.
One way to use reverse mortgage money is to pay off the current mortgage. For individuals receiving Social Security or who have a pension, the change in monthly costs represented by this program can be enormous. As an example, you might replace a mortgage that costs $1,500 a month with a mortgage that has no cost for principal and interest.
The catch is that while the loan does not have to be repaid until the borrower moves, sells or passes away, the homeowner does have to make payments for property taxes and insurance. In other words, monthly housing costs might decline from $1,500 to $300 or $400. In these tough times, many older homeowners have not been making such payments and the result is that they can actually lose their homes to foreclosure even though they are not making monthly mortgage payments.
Lenders want the program to continue because they have 100 percent coverage against any losses. HUD, on the other hand, is backing a product line which produces big losses. If HUD were a private company it would long ago have ended the reverse mortgage program for financial reasons.
Big changes coming?
There are now some ideas floating around which suggest how the program could be changed. For instance:
- HUD could insist on an income test to assure that borrowers have enough cash flow to pay their property taxes and insurance
- Require escrow accounts so that borrowers make monthly payments which then go to pay off their property taxes and insurance
- Lastly, HUD could change the program to increase insurance premiums as a way to offset reverse mortgage losses
Some in the industry will be very unhappy with the changes that HUD may undertake, but HUD has every right to either improve the program or to end it. After all, with mortgage rates so low, the program remains enormously attractive but it remains attractive in a way which is costly to HUD and is ultimately unsustainable.