Falling home prices challenge HECM
The Department of Housing and Urban Development Home Equity Conversion Program for reverse mortgages continues to challenge the Federal Housing Administration’s bottom line, especially as home prices fluctuate.
The Government Accountability Office addressed some of the issues the HECM reverse mortgage program is creating for the agency in an update on the FHA.
HECM is the only reverse mortgage program for seniors insured by the federal government, but the GAO warns that it can, at times, posse significant financial risks to the FHA.
One of the biggest risks facing the FHA is losses that occur when property owners or executors of an estate end up with mortgage balances greater than the property value at the time a reverse mortgage borrower exits a home.
Unlike conditions now, where home prices are appreciating, this situation can occur in an environment of steep value declines This may result in a situation where the owner or executor are more likely to convey the property to HUD to sell after sensing the potential for returns are minimal or non-existent.
In this situation, HUD ends up paying about 12% of the property value just to manage and market the home, "increasing the severity of loss for the FHA," GAO reported.
In fact, an independent actuary report has already projected the HECM portfolio is currently in the negative $2.8 billion-range, according to GAO.
Other challenges facing the reverse mortgage program include the fact that a majority of borrowers tend to take out 80% or more of the maximum equity amount possible in their first draw.
These loans are "twice as likely to have a tax-and-insurance default than loans with initial draws of 60%, and four times as likely as loans with initial draws of 40%," GAO said.
Furthermore, when a borrower takes so much cash up front, they are more likely to experience a shortfall in cash years later, preventing them from paying for ongoing property upkeep, taxes and insurance.
Carol Galante, acting commissioner of the Federal Housing Agency, recently 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 this year.
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.