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Concerned about financial losses in a federally insured mortgage program for seniors, the Department of Housing and Urban Development on Aug. 29 announced plans to adjust premiums and limit financial draws for elderly homeowners taking such loans.
Department officials said the economic value of the federal reverse-mortgage program, estimated at negative $7.7 billion last year, is putting at risk the Federal Housing Administrationâ€™s entire insurance fund that supports all single-family loan programs, including traditional mortgages.
The federal reverse-mortgage program, officially called a home equity conversion mortgage, or HECM, has been marked by problems, including a rise in foreclosures, as reported in late August by The Washington Post. Department officials said that if quick fixes arenâ€™t made, the program will require an appropriation from Congress to ensure that the entire insurance fund maintains required reserves.
Home prices and interest rates, among other things, have made the reverse-mortgage program volatile, department officials said.
â€œFairness dictates that future HECM loans do not adversely impact the overall health of FHAâ€™s insurance fund, which supports the financing needs of younger, mostly first-time homeowners with traditional FHA mortgages,â€� Secretary Ben Carson said in a prepared statement. â€œWeâ€™re taking needed and prudent steps to put the HECM program on a more sustainable footing.â€�
Reverse-mortgage loans are meant to help seniors age 62 and older â€œage in placeâ€� by giving them cash from the equity in their homes. Borrowers typically receive a line of credit or a loan in a lump sum or in monthly payments. They are allowed to defer payments on the debt until they die, move away or do not meet loan obligations, such as paying property taxes and insurance.
A key change to the program will be how much insurance senior borrowers will need to pay to the department to obtain loans. They will be required to pay a standard 2 percent upfront insurance fee based on the maximum amount they can borrow on their home. Currently, insurance premiums range from 0.5 percent to 2.5 percent. The change will be offset by a drop in an annual insurance rate of 0.5 percent, reduced from 1.25 percent, officials said.
After Oct. 2, senior borrowers also will face new limits on how much they can borrow from their homes. Currently, limits are based on interest rates and the age of a borrower. Now a 62-year-old with an interest rate of 5 percent for the loan would be able to obtain about 41 percent of the equity in their property, down from 52 percent. An 82-year-old would be able to access 51 percent of the equity, down from nearly 60 percent.
Department officials said the changes arenâ€™t intended to offset losses from earlier loans, but instead to help improve the insurance fund. Every reverse-mortgage loan is projected to lose money, officials said. A 2016 department actuarial report shows that the reverse-mortgage program is expected to balloon to negative $12.5 billion in 2023.
Housing and consumer advocates wondered how the changes would affect a program that has insured more than 1 million borrowers since its inception. Ira Rheingold, executive director of the National Association of Consumer Advocates, worries that needy seniors will find it harder to get help. He said the department is punishing low-income homeowners for problems that were aggravated by poor federal management. Among the issues, the department encouraged lenders to help homeowners maximize the sizes of their loans by taking younger spouses off the mortgage documents, leading to foreclosures on widows, he said.
â€œItâ€™s their own fault for any losses they are seeing,â€� he said. â€œThe response is to make it harder for people who need the money to get access to the program.â€�
McKim is part of the New England Center for Investigative Reporting can be reached at jenifer.mckimnecir.org. The New England Center for Investigative Reporting is based out of Boston University and WGBH public radio. This report was produced in partnership with the McGraw Center for Business Journalism at the City University of New York Graduate School of Journalism. NECIR interns Miranda Suarez and Debora Almeida were contributors.
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