Can FHA reverse mortgages be saved?by Peter Miller
There was a big commotion last week when HUD announced that the reserves “used to support FHA’s single family mortgage and reverse mortgage insurance programs fell below zero to -1.44 percent. This represents a negative economic value of $16.3 billion.”
In fiscal 2012, the government accounting calendar which just ended, the FHA insured 1,239,874 loans. Most of these were “forward” loans, the 15-year mortgages and 30-year mortgages that most of us consider when we buy or refinance real estate.
However, a small percentage of all FHA loans were home equity conversion mortgages (HECMs), or FHA reverse mortgages. In total, the FHA insured 54,820 HECMs in fiscal 2012, about 25 percent less than in 2011.
Fewer reverse mortgages
As it turns out, fewer reverse mortgages are a good thing for HUD and the FHA. The reason is that such loans have racked up amazing loss levels. For example, in fiscal 2012, there were 11,791 reverse mortgage claims – a number that was 48.3 percent higher than the year before. In comparison, “regular claims” grew 20.9 percent during the same period.
When it comes to financial reports to Congress, HUD actually issues two of them for the FHA: one report for forward mortgages and one report for reverse mortgages. What these two reports tell us is very interesting.
In the case of forward mortgages, the FHA’s reserve fund, called the Mutual Mortgage Insurance Fund Forward Loans, supports insurance coverage for loans worth $1.126 billion. A separate reserve for reverse mortgages, called the Mutual Mortgage Insurance Fund Home Equity Conversion Mortgages, backs reverse mortgage insurance worth $78.2 billion.
Reverse mortgages=huge losses
The bottom line is this: reverse mortgages have outsized losses and those losses raise the question of, whether at a time when many people want “less government,” should reverse mortgage standards be changed to reduce losses going forward?
In fact, some changes have been made — consider the introduction of the HECM Saver program. But is this enough?
The “Saver” concept — which creates smaller loans for borrowers as well as lower up-front costs — could be very helpful to the FHA in terms of risk reduction. Yet, more HECM Savers would have to be originated. In fiscal 2012, only 3,820 out of 54,820 HECMs were Savers.
More HECM Savers
HUD could encourage lenders to push the Saver program by allowing bigger fees or higher mortgage rates, but these approaches hurts borrowers. The number or dollar value of new HECMs could also be restricted.
Or, maybe we missed the boat. Maybe with home values rising in most areas the problem of HECM risk will simply be reduced. If that’s the case then HUD, seniors and lenders will have lucked out.