The controversial reverse mortgage products offered by the FHA are undergoing changes. Some are options that could be put in place right away and others would require bigger changes at the government level.
The reverse mortgage backed by the FHA, known as The Home Equity Conversion Mortgage (HECM) program, hasn’t resulted in the kinds of success the government had hoped for. In fact, U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan says he’s making plans to turn the troubled program around and is calling them “blunt changes”.
Protecting the Agency
Asked to testify in front of the U.S. Senate Banking Committee last week, Donovan carefully outlined his ideas and changes to better protect the federal agency from the mounting losses in the reverse mortgage program. One of those blunt changes he refers to includes consolidating the two HECM loan options – the Fixed Rate Standard Program and the Fixed Rate HECM Saver Program. This sort terms solution will allow FHA to adjust the different variations that help determine how much a senior qualifies for, which would result in fewer amounts of monies being lost.
He also had long-term suggestions that could benefit both the federally backed program and those who take advantage of it. Those changes, he said, would require new legislation or possibly even massive overhauls in the “rule making process”. Nevertheless, they shouldn’t be dismissed, said Donovan. They include limiting how much seniors can draw at the time of mortgage origination to mandatory obligations shifted to the borrower. Traditionally, the borrower covers closing costs and already-existing mortgage debt. Federal loan repayment could be added as well.
New Determination Scale
A more formal financial assessment of the borrower’s financial standing prior to loan approval and a new determination scale for the “suitability of various HECM products for that person”. He also recommended establishing a requirement for setting aside taxes and insurance premiums to that there would be sufficient equity established. An annuity could be established that would pay those taxes and premiums on the property.
Another recommendation included shifting the HECM program in its entirety to the FHA via Mortgagee Letters. These are used to make changes in the various 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,
Many seniors are turning to these reverse mortgage programs in order to convert their equity into an income or line of credit. This is sometimes used to pay down credit card debt or to set up their expenses after retirement. It’s paid back once the homeowner no longer occupies the home. Currently, the requirements include:
- Using the age of the youngest borrower if there are co-signers
- Requirements for consumer counseling and education before the loan is approved
- The borrowers must live on the property and it must be their primary residence
What makes these loans so attractive is there are no income or even credit requirements associated with these products. The mortgage details are based on the appraised property value or the FHA determined insurance limit – whichever is lower. The loan is established using current interest rates and at this time, the closing costs are added into the mortgage itself. These loans are applicable only for single family homes, though there are instances where mobile homes and condominiums can be used. Borrowers must be current with FHA determined flood requirements and other property standards.
Once the loan is approved the borrower does not have to repay those monies until the house is sold, either after death or other circumstances. The loan itself is paid out of the proceeds of the property. Any leftover funds go to the homeowner or his heirs. If there’s not enough to cover the loan, the balance is made up via federally backed insurance.
These changes would also require estate executors to dispose of HECM-mortgaged properties themselves. Incentives could be offered. This would lift the burden from the FHA of disposing or selling the property.
Donovan said, during his testimony,
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 incentivtizing 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.
Reverse mortgages have been offered by the government since 1934. In recent years, they’ve come under fire after private lenders began offering them.
What are your thoughts on reverse mortgages? Do they feel too predatory -natured to you or is it a fine option for seniors to enjoy their retirement years without fears of financial shortcomings? Let us know your thoughts.