Reverse Mortgages Draining FHA Resources, Overhaul Needed


Several housing authorities recently
suggested changes to the form and operation of the Home Equity Conversion Mortgage
(HECM) program, more commonly known as reverse mortgages. The program, administered
by the FHA, serves homeowners over the age of 62, allowing them to draw on
their home equity while remaining in their homes.

Last year the Department of Housing
and Urban Development (HUD), FHA’s parent agency, made significant changes in rules
affecting HECM borrowers
. The first change reduced the maximum mortgage amount from
60 to 70 percent of the borrower’s home value, and introduced a new formula,
tied to not only the property value, but also loan rates and the applicants age.  At the time this change was announced, it was
predicted the typical applicant, who was previously able to borrow 64 percent
of the home’s value, would now average 58 percent. Second, the upfront premium
was raised
from a range, depending on the amount of the loan, of 0.5 to 2.5
percent to a flat 2.0 percent.

HUD and FHA officials said the overall changes, which went into
effect on October 2, 2017,
were driven by the agencies’ core mission, which was being hampered by the
program.  They maintained the HECM
program was taking resources away from the department’s primary goal, helping
first-time and lower-income homebuyers achieve their goals.  However, the changes appeared to be aimed less
at putting the program, which has been plagued by defaults and foreclosures, on
an even footing than in benefitting lenders.

Still, actuarial
reports have confirmed that the program is an economic drain; the most recent
showed the program with an economic value of negative $14.5 billion, nearly twice
the deficit found a year earlier.  Now
there appears to be growing sentiment for a more radical change.

At a recent
seminar hosted by the Urban Institute, former FHA commissioner Carol Galante, now
the faculty director of the University of California Berkley’s Terner Center
for Housing Innovation, suggested that HECM loans should be separated from the
bulk of FHA lending. She said the agency’s capital reserves should be split
into two separate units, one for the forward programs and the other for
HECM.  She also suggested removing the
latter from the capital reserve requirement which is mandated by Congress to be
a minimum of 2.0 percent of the balance of outstanding loans. Other seminar
participants, the Urban Institute’s Linda Goodman, and David Stevens, also a
former FHA commissioner and current president of the Mortgage Bankers
Association concurred with Galante’s bifurcation suggestion.

According to Alex Spanko, writing in Reverse Mortgage Daily, Galante had
other suggestions for reforming FHA apart from the reverse mortgage program.  

  • Capping loan limits
    100 percent of the median home price in the local markets rather than the
    current 115 percent.

  • Redefining local
    markets into smaller units such as ZIP codes or census tracks to better reflect
    local conditions.

  • Restricting FHA to guaranteeing
    only purchase mortgages and refinances of its own mortgages when economic
    conditions are “normal.”

  • Provide
    the agency with greater flexibility in loss mitigation strategies and use of
    operating capital to minimize losses.

  • Establish new capital reserve
    standards that better account for tail risk.

  • Restructure FHA’s
    , allowing Rental Housing Programs, Housing Counseling, and
    Manufactured Housing to be absorbed into other HUD departments.

“FHA’s focus must
remain on underserved populations while also continuing to serve a broad
spectrum of lower-wealth homebuyers,” Galante said.  

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