Reverse mortgages, home loans designed for older homeowners that requires no monthly mortgage payments, have come into the spotlight recently after the Federal Housing Administration stated that the insurance program backing reverse mortgages is “losing money and can no longer remain viable in its present form.”
HUD claims that because of the program, which is known as FHA Home Equity Conversion Mortgage, “younger, lower-income homeowners are routinely bailing out the HECM program through the mortgage insurance premiums that they pay.”
“We can no longer tolerate putting American taxpayers and future generations of seniors at risk. Quite simply, the HECM Program is losing money and can no longer remain viable in its present form,” HUD adds.
Reverse mortgages, which allow seniors to use their home equity to offset loan payments until they die, sell, or move, simply add the interest to the loan balance each month. In fact, the loan balance can grow to exceed the value of the home if market rates falter.
“A reverse-mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” says Richard Cordray, Director of the Consumer Financial Protection Bureau. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”
Over one million seniors have signed onto reverse mortgages, which has led to an increase in foreclosures in these types of loans. Last year, 3,600 foreclosure processes were linked to reverse mortgages, according to government data.
Many reverse mortgage foreclosures have come under fire given their dubious validity.
One Florida couple that was accused of not living in their home, despite the fact they were served with papers at the location had their property sold by the bank, losing their possessions in the process.
“Wrongful reverse-mortgage foreclosures are at a crisis stage and there are very few, if any, protections from the bad practices of the servicers,” Jacksonville Area Legal Aid says. The group has criticized a “lack of meaningful oversight” from federal authorities who are tasked with overseeing foreclosure attempts.
The U.S. Department of Housing and Urban Development (HUD) program is meant to keep seniors in their homes.
“The whole reason behind this program is to offer seniors a financing option that allows them to remain in their home for as long as they’re able,” said HUD spokesperson Brian Sullivan. “While there are requirements of these senior borrowers, our primary interest is to preserve their homeownership.”
Despite the program’s good intentions, the negative net worth of reverse mortgages has grown in 2017 to $14.5 billion from $7.7 billion a year before, an annual report shows. New rules that took effect in October hope to increase the up-front insurance premiums and lower the borrowing limit on reverse mortgages.
“Our duty is clear — we must make certain FHA remains financially viable so future generations can build wealth and climb the economic ladder of success,” Secretary of Housing and Urban Development Ben Carson said on November 15.
Industry leaders are not convinced by the government measures to salvage the program.
“We think what they did is overkill,” says Peter Bell, the president of the National Reverse Mortgage Lenders Association, noting that the most common cause for default is death of the last surviving homeowner. He also says that these foreclosures require no eviction and that new underwriting standards established in 2015 have reduced the risk of default for not paying insurance and taxes.
Despite disagreements over the effectiveness or legitimacy of the program, the government may have to step in to maintain it, which could mean higher taxes.
Brian Chappelle, a founding partner of Potomac Partners, a financial consulting company in Washington D.C., believes the program was ha been detrimental to other homeowners.
“The reverse mortgage program has helped tens of thousands of seniors to tap the equity in their homes to improve their quality of life as they age and the government should certainly play an important role in meeting this need.” he says. “At the same time, as HUD noted in August, FHA homeowners, many of whom are lower-income, minority and first-time homebuyers, are paying a steep price to bail out the HECM program.”
Some observers have questioned whether the HECM program should continue in the same fund as other kinds of mortgages, or be placed into its own insurance fund and evaluated on its own merits.
Carol Galante, faculty director at the Terner Center for Housing Innovation and former assistant secretary for Housing/Federal Housing (FHA) Commissioner, says, “To those like me, who have followed closely the annual reports of past years, the results also speak to how volatile and different the Home Equity Conversion Mortgage (HECM) program is from the broader forward single-family portfolio. Every year since 2010, the HECM portfolio has alternated in large swings between negative and positive economic values. Each year, even though this portfolio is only a small fraction (.1 trillion) of the overall 1.1 trillion-dollar portfolio, it impacts the overall capital ratio, which is the measure most relied upon to assess the FHA.”
Mortgage Bankers Association President David Stevens believes that creating a separate fund for reverse mortgages could be the solution.
“Removing it would strengthen the MMIF, give a more accurate look at the health of FHA’s forward book of business and could allow for the consideration of a mortgage-insurance premium reduction,” Stevens said.