Saying itâ€™s losing money on reverse mortgages, the U.S. Department of Housing and Urban Development announced Tuesday, Aug. 29, it will raise up-front fees and tighten limits for the program starting in September and October to avoid having to dip into the U.S. Treasury to cover troubled borrowers.
The reforms, announced in a morning conference call, are designed to stem $11.7 billion in losses since fiscal year 2009 to the Federal Housing Administration, which insures reverse mortgages, a loan available to homeowners age 62 and older. Due to these losses, reverse mortgages have become a drag on the FHA insurance program, called the Mutual Mortgage Insurance Fund, the agency said.
â€œQuite simply, the (reverse mortgage) program is losing money and can no longer remain viable in its present form,â€� a HUD fact sheet released Tuesday said. â€œToday, younger, lower-income homeowners with traditional FHA-insured â€˜forward mortgagesâ€™ are routinely bailing out the (reverse mortgage) program through the mortgage insurance premiums they pay, placing a significant burden on the overall health of FHAâ€™s Mutual Mortgage Insurance Fund.â€�
Reverse mortgages are designed to help senior homeowners bridge gaps in their retirement savings by tapping into the â€œequityâ€� stored up in their properties. Equity is the value of their homes over the amount owed on existing home loans.
Unlike traditional forward mortgages, borrowers donâ€™t have to make monthly payments under a reverse mortgage, but rather draw cash from the lender either monthly, in a lump sum, as a line of credit or by some combination of the three. California leads the nation in FHA-insured reverse mortgages issued from 2009-16, HUD reported, followed by Florida, NewÂ YorkÂ and Texas.
Loans issued under the 30-year-old program mushroomed in the mid-2000â€™s because reverse mortgages traditionally were easier to qualify for than traditional forward mortgages. The FHA has been reacting to a series of losses under the program.
In November, HUD reported the economic value of its reverse mortgage insurance fund fell to a negative $7.7 million in fiscal year 2016, down from a positive value of $6.8 billion a year earlier. The agency reported also that just over 89,000 of the 642,000 existing FHA-insured reverse mortgage borrowers were a year or more behind on property tax or insurance payments. Â HUD determined just over 18 percent of FHA-insured reverse mortgage borrowers were at risk of losing their homes as of November.
A number of reforms implemented over the past several years sought to tighten reverse mortgages. Among them are requirements that borrowers get counseling from financial planners before taking out a reverse loan, and that lenders verify borrowersâ€™ ability to pay property charges such as taxes, maintenance and insurance. Failure to pay those charges are a leading cause of foreclosure since taxes and insurances typically are included in forward mortgage home payments but not reverse mortgages.
The National Reverse Mortgage Lenders Association offered support for the regulation updates, but it cautioned the new limits on lending and the fee increase could be improved.
â€œWe believe that there are alternative options for better managing the HECM program to reduce its overall costs and will continue to advocate for such beneficial changes to the program,â€� an NRMLA statement read.
The reforms announced Tuesday will have no effect on existing reverse mortgage borrowers.
Among the reforms designed to offset future losses, HUD proposed:
- Up-front mortgage insurance fees for most reverse mortgage borrowers will go up, while monthly FHA mortgage insurance payments will go down. Currently, new borrowers receiving so-called â€œlower drawsâ€� must pay 0.5 percent of their loan amount in an up-front insurance payment at the time the loan is issued, while those receiving â€œhigher drawsâ€� must pay 2 1/2 percent up front. Effective Oct. 2, all borrowers will pay a standard 2 percent up-front insurance fee, raising reverse mortgage fees for some borrowers. Those changes will affect most new borrowers, the Wall Street Journal reported.
- The annual mortgage insurance premium, or MIP, will be lowered to 0.5 percent from 1.25 percent to provide â€œfee reliefâ€� to borrowers and slow the rate at which the loan balance grows, HUD said.
- Starting Oct. 2, new limits will be imposed, lowering the amount of cash borrowers can draw from the equity of their home. The average borrower will be able to draw about 58 percent of the value of their homeâ€™s equity, down from 64 percent, with limits varying by the borrowerâ€™s age and the loanâ€™s interest rate, the Journal said.
- Effective Sept. 19, previously announced reforms designed to decrease reverse mortgage defaults will begin. Those reforms include requiring a financial assessment of future borrowers to make sure they will have to means to pay charges on their home such as property taxes, homeowners insurance, homeowners association dues and maintenance costs.
Reverse mortgage losses are making it increasingly challenging for FHA to maintain insurance reserves that Congress requires, HUD stated Tuesday.
HUD blamed reverse mortgage losses for Congressâ€™ first-ever $1.7 billion appropriation in 2013 to shore up losses to the FHA mortgage insurance fund.
â€œIf FHA does not act, the (reverse mortgage) program would require an appropriation from Congress for FHA to endorse new reverse mortgages in FY 2018,â€� HUD said.
The statement added: â€œWe can no longer tolerate putting American taxpayers and future generations of seniors at risk.â€�
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