The Federal Housing Administration has lost about $5 billion from its reverse mortgage program and needs to make changes to preserve the increasingly risky option for senior homeowners.
Housing officials told members of the House Financial Services Committee Thursday that reverse mortgages, known more formerly as the Home Equity Conversion Mortgage (HECM), is the primary driver behind the FHA’s need for a $943 million bailout for its insurance fund.
The government mortgage insurer needs to replenish reserves at the end of fiscal year 2013 for future losses. A final decision likely would not be made until the fiscal year ends Sept. 30.
FHA-backed reverse mortgages have been hit hard by home price depreciations — despite more recent home price gains.
Of the almost 600,000 reverse mortgages outstanding, 9.8 percent are currently delinquent, up from 8 percent in 2011.
Reverse mortgages allow homeowners 62 and older to borrow money against the value, or available equity, of their homes and not pay it back unless they move out.
“This product, particularly as it has been structured to date, is sensitive to borrower longevity, home prices, and economic conditions,” according to prepared testimony by officials with the FHA, under the Department of Housing and Urban Development. “Lower than anticipated home price appreciation substantially affected the expected performance of the portfolio relative to Fiscal Year 2011 estimates.”
The HUD officials said changes in the ways borrowers utilize the HECM have shifted the “risk profile of the program.”
The “shift” has to do with more borrowers taking all of the funds available to them up-front, while they often do not have the resources necessary in later years to pay property taxes and insurance — “thereby triggering a default on the loan,” the HUD officials said.
Originally designed to be used like an annuity, more reverse mortgage borrowers in recent years have shifted toward full draws via the “Fixed Rate Standard” product.
Since 2009, FHA has worked to re-evaluate the HECM program and make adjustments where necessary. But more modifications are needed.
Specifically, housing officials are planning to:
- Limit the amount of the allowable draw;
- Where appropriate, mandate the use of escrow accounts or a set-aside to ensure continued and timely payment of property charges including taxes and insurance, and;
- Require the use of a financial assessment as part of the loan origination process to ensure the appropriateness of HECM products for potential borrowers
FHA’s share of the mortgage market has come down to 16.5 percent as of the 4th quarter of 2012, from a peak of 21 percent in 2010.