FHA plans changes to their reverse mortgage programsby Marcie Geffner
Seniors who want to tap their home equity through a reverse mortgage might want to keep a close watch on the Federal Housing Administration (FHA).
The Home Equity Conversion Mortgage (HECM) program, a reverse mortgage backed by the FHA, is showing signs of substantial stress, and U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan has a plan to relieve the pressure.
HUD proposes ‘blunt changes’
Donovan outlined his proposals in prepared testimony to the U.S. Senate Banking Committee last week. While most of his discourse concerned the FHA mortgage insurance fund, he also outlined “blunt changes” he wants to make to protect the FHA from losses in the HECM program.
In the near term, Donovan said the FHA plans to consolidate its two HECM options–the Fixed Rate Standard program and Fixed Rate HECM Saver product–and adjust the factors that are used to determine the maximum amount a senior can borrow. These changes likely would result in smaller maximum loan amounts across the board.
Longer term, other changes would require federal legislation or a lengthy rule-making process. These proposals include:
- Limiting the senior’s draw when the mortgage is originated to mandatory obligations, such as closing costs, existing mortgage debt and federal loans
- Performing a financial assessment of the borrower as a basis for loan approval and to determine the suitability of various HECM products for that person
- Establishing a tax and insurance set-aside to ensure sufficient equity or an annuity is available to pay taxes and insurance on the mortgaged property
Donovan also proposed that the FHA to be allowed to manage the HECM program through Mortgagee Letters, which are used to make changes in other FHA loan programs.
“In light of the HECM portfolio’s sensitivity to changing market conditions, this change would provide FHA with the flexibility to make necessary changes as soon as trends or issues are identified within the HECM program,” Donovan said.
The FHA also intends to offer estate executors new incentives to dispose of HECM-mortgaged properties themselves, rather than convey the properties to the FHA after the senior dies.
“Over the past few years, larger numbers of executors have been choosing to convey these properties to FHA rather than sell them, adding costs and reducing recoveries for FHA. By incentivizing the sale of properties by executors, FHA is able to avoid property management, maintenance, and marketing costs associated with the disposition process, thereby reducing losses to the fund on these properties,” Donovan said.
How all these proposals will affect reverse mortgage borrowers will depend on the extent to which the proposals are enacted and implemented and how soon.