Galante signals cessation of FHA-insured reverse mortgage product
Carol Galante, acting commissioner of the Federal Housing Agency, informed a U.S. senator that the FHA is calling for a moratorium on its Standard Fixed Rate Home Equity Conversion Mortgage.
In a letter to U.S. Sen. Bob Corker, R-Tenn., Galante confirmed plans to place the well-known reverse-mortgage product into moratorium by Jan. 31, 2013.
The Standard HECM is an FHA solution that offers seniors above the age of 62 a reverse mortgage. Essentially, participants are able to draw equity out of their homes as long as the financed properties are mostly paid off.
But Galante's letter shows the FHA growing more wary of losses to the program and to U.S. taxpayers. It also suggests she's willing to compromise with lawmakers who previously disapproved of Galante taking a larger role at the FHA.
"While declining home prices and greater longevity of seniors have yielded greater projected losses, another major contributor has been the lack of a secondary market for these loans," Galante wrote. "There are many explanations for the evolution of these complexities, but the end result has been an increase in risk to both FHA and borrowers that must be rectified immediately."
Galante then confirmed that the FHA is working on a policy directive that would result in the immediate cessation of the Standard Fixed Rate HECM product.
For policy analysts at Compass Point Research & Trading, Galante's letter signifies a mutual truce between the FHA and Sen. Bob Corker (R-Tenn.), who previously raised concerns about the agency's solvency and opposed Galante's nomination to head the FHA.
"With Galante's commitment to undertake a series of changes at the FHA, Corker has stated that he will end his opposition to Galante's confirmation," Compass Point wrote.
In her letter, Galante addressed some of Corker's other concerns by assuring the Senator that the agency is taking steps to get the private market back into the jumbo mortgage marketplace. She explained the FHA will roll out a policy that decreases the maximum loan-to-value ratio on loans above the $625,500 threshold to 95% from 96.5%, which essentially increases the down payment from 3.5% to 5% for these mortgages.
As FHA loans price in more risk, the private market gains competitive footing with pricing levels becoming more comparable between the government-backed and private markets.
Galante says back in June, the FHA began pricing mortgage insurance premiums for loans valued above the $625,500-threshold at a level 25-basis points above those with lower loan limits.
"The combination of a higher down payment and higher mortgage insurance premiums for these loans will continue our efforts to drive this business to the private market," Galante told Corker in her letter.
The acting commissioner also noted the FHA is in its final stages of a forming a policy directive that will force borrowers with credit scores under 620 to have a maximum debt-to-income ratio of no greater than 43% to be approved for the FHA's Total Scorecard system. In the future, any loan exceeding 43% DTI will have to be manually underwriten by the lender and fully reviewed for other risk-mitigation factors in order to qualify for FHA financing, Galante wrote.