FHA Needs $800 Million for Reverse Mortgage Losses

The US Department of Housing and Urban Development (HUD) in its fiscal year 2010 budget proposal requests $798m for the Federal Housing Administration’s (FHA) reverse mortgage program.

The Home Equity Conversion Mortgage program offers FHA-insured reverse mortgages to seniors, aged 62 years or older, who want access to the equity in their homes via monthly streams of income or a line of credit to be repaid when they no longer occupy the homes.

The problem inherent in the program, however, is the unpredictability in housing prices.

If a senior pursues a reverse mortgage line of credit on a home at $300,000 but the value later drops to $250,000, FHA must assume any losses. HUD does not seem to have forgotten the drawback, since the budget calls for nearly $800m to cover anticipated future losses.

The budget proposal reads, in part: “The need for appropriated funding for this program reflects the sensitivity of reverse mortgages to changes in home price assumptions.” Or in other words: If home prices fall going forward, FHA’s insurance fund could be hard hit by reverse mortgages.

But the program, and FHA, is still viable, HUD officials said.

HUD secretary Shaun Donovan stressed the budget’s focus on responsibility and transparency, not just in FHA but throughout the department. The budget strengthens FHA, curbs mortgage abuse and predatory practices and increases counseling for homeowners at risk of foreclosure, he said in a statement.

“We are cutting or consolidating programs that don’t work and instead, investing in programs that do work,” Donovan added.

HUD’s budget also requests $37m for an agency-wide initiative to prevent mortgage fraud and predatory lending practices: $20m to boost fraud detection, $4m for additional staff to address abusive and fraudulent concerns and $13m for efforts to curb discrimination.

“Such additional funding will support the efforts of traditional fair housing centers, consumer protection advocates and others in waging a comprehensive response to discriminatory mortgage practices and mortgage rescue scams,” HUD officials said in the budget proposal.

HUD has faced recent criticism over insufficient staffing and resources needed to investigate certain types of discrimination in mortgage lending. The National Fair Housing Alliance (NFHA) concluded in its 2009 Fair Housing Trends Report that 93 private non-profit fair housing organizations processed almost twice as many cases of discrimination — made on the basis of race, color, national origin, religion, sex, familiar status and disability — last year as HUD, the US Justice Department, and 107 state and local government agencies combined.

The request for $13m to pursue discriminatory cases might reverse the trend seen by NFHA last year.

Read HUD’s budget proposal.

HousingWire takes an in-depth look at the workings, benefits and drawbacks associated with reverse mortgages in the upcoming June magazine issue.

Write to Diana Golobay.