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HUD announces changes to reverse mortgage program to lower taxpayer risk

Raises premiums to the Home Equity Conversion Mortgage program

The Department of Housing and Urban Development is finally changing the requirements around its reverse mortgage program, announcing plans on Tuesday to raise premiums and place tighter loan limits.

The government’s Home Equity Conversion Mortgage program has faced scrutiny due to the high risks associated with the program. While improvements have been made on it, it still is one of the most volatile parts of the Mutual Mortgage Insurance Fund, which is the Federal Housing Administration’s flagship fund.

The program, created for seniors aged 62 or older and still living in their home, allows them to withdraw a portion of their home’s equity, according to HUD’s website.

For some older homeowners that are potentially in need of additional income, a reverse mortgage allows them to take the equity out of the house through lump-sum withdrawals, regular payments, or a line of credit.

The loans do not need to be paid off until the borrower dies, sells the house, or moves.

According to an article in The Wall Street Journal by Laura Kusisto, the Trump administration is making the changes to put the program, which is backstopped by taxpayers, on a stronger financial footing.

Here are the changes the article outlines:

Most new borrowers will pay bigger premiums upfront but lower ones over the life of the loan, lessening the risk to taxpayers if seniors live longer than predicted. Borrowers will now pay 2% of the amount of the home’s value upfront and 0.5% annually over the course of the loan.

Currently, most borrowers pay 0.5% upfront and 1.25% annually over the remainder of the loan. Some who borrow more than 60% of the amount they can borrow against the home in the first year already pay 2.5% upfront so they will see premiums go down slightly.

On balance, most seniors will also be able to borrow less money. The average borrower at current interest rates will be able to borrow roughly 58% of the value of their home, down from 64%.

The article also added that the modifications are only going to apply to borrowers who take out new loans.

In response to the need to improve the reverse mortgage program, HUD Sectary Ben Carson put out the following statement in a tweet, as seen below.

As it stands, there have already been some improvements made to the reverse mortgage program. Back in July last year, a study from the Center for Retirement Research at Boston College showed that changes made to the rules governing reverse mortgages, specifically those that are part of the government’s Home Equity Conversion Mortgages program, would dramatically cut the risk of default for borrowers.

According to the Boston College study, a combination of policy changes from 2013 and 2015 are projected to cut the number of defaults on new reverse mortgages by 50%.

The program changes, which are designed to prevent HECM borrowers from missing their property tax and insurance payments, should help borrowers avoid falling behind, the study showed.

It was welcomed news given that in 2014 the Office of the Inspector General for HUD audited HECM and found that borrowers using the program are not in compliance with residency requirements when concurrently participating in the Housing Choice Voucher program.

In its findings, the HUD-OIG found that as many as 136 out of 159 borrowers — 86% — who were reviewed were not living in the properties associated with their loans because they were receiving rental assistance under the Voucher program for a different address at the same time.

The findings were a direct result of HUD not having the controls to prevent or mitigate the problem, according to the OIG.

And these risks involved in the HECM program are clearly being seen in the volatility of the MMIF.

Looking over the results from the Federal Housing Administration’s Actuarial Report the past couple of years, what got the capital ratio above 2% is HECM, which has as history of wild swings. The 2% is the Congressionally mandated threshold.  

Carol Galante, faculty director at the Terner Center for Housing Innovation and former assistant secretary for Housing/Federal Housing (FHA) Commissioner, voiced similar concerns in her blog with HousingWire.

To those like me, who have followed closely the annual reports of past years, the results also speak to how volatile and different the Home Equity Conversion Mortgage (HECM) program (a reverse mortgage for seniors) is from the broader forward single-family portfolio. Every year since 2010, the HECM portfolio has alternated in large swings between negative and positive economic values. 

Each year, even though this portfolio is only a small fraction (.1 trillion) of the overall 1.1 trillion dollar portfolio, it impacts the overall capital ratio, which is the measure most relied upon to assess the FHA.  

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