While regulators have been quick to point out the defects within the Federal Housing Administration's Home Equity Conversion Mortgage program, advocates defended the reverse mortgage program, suggesting changes that will, in turn, strengthen the FHA Mutual Mortgage Insurance Fund.
Panelists on Tuesday told members of the U.S. Senate Committee on Banking, Housing & Urban Affairs that proposed changes could have a stabilizing effect on the program, which would assure its existence for years to come and more importantly, provide appropriate resources to seniors to avoid financial abuse.
In its current situation, FHA may be required to tap into $943 million in taxpayer bailout funds, which would be the first such injection in the history of the FHA.
The housing agency attributes any remaining financial stress from mortgages insured under the FHA’s HECM program.
While mortgage analysts agreed that the program has missteps, they all concluded that changes can be made to the reverse mortgage program to improve the sustainability of the MMI fund.
"Changes to the HECM program should not come at the expense of seniors of modest means for whom the program was originally designed," said Ramsey Alwin, senior director of economic security for the National Council of Aging.
Alwin added that the program is an important retirement planning option for lower-to-middle-income older homeowners.
As taxpayers live longer, there is an increased responsibility to plan for future financial securities. As a result, older homeowners are looking for a solution to help manage their financial situations and if used wisely, a reverse mortgage could assist seniors.
"Over the past 10 years, reverse mortgages have evolved both as a product and as a solution for many financial security concerns," Alwin explained.
He added, "We can expect that both the reverse mortgage industry and the marketplace will continue to change as the Baby Boomers represent a growing portion of the pool of potential borrowers."
With the housing crisis devastating millions of seniors the HECM program has witnessed various fundamental flaws.
Nevertheless, FHA has taken steps to strengthen the HECM program with more recent books of business, including reducing the ‘principal limit factors’ on two occasions and increasing the annual mortgage insurance premium, explained Peter Bell, president & CEO for the National Reverse Mortgage Lenders Association.
Going forward, Bell outlined three changes that are under discussion to improve the HECM program including financial assessment of loan applicants, which would be a form of underwriting that would assess each applicant’s sources of funds and expenses to make sure borrowers have sufficient resources to meet their payments.
Additionally, the FHA should consider implementing restrictions on the amount of funds that could be drawn down at closing, Bell noted.
"A Principal Limit Utilization (PLU) restriction would allow borrowers to only draw enough at closing to pay-off existing liens on the property, plus the costs associated with obtaining the loan and some modest 'stipend' for paying other current expenses," the president and CEO said.
Furthermore, to help avoid lenders being required to advance its own funds to cover their housing payments, the FHA should implement a requirements for a 'set-aside' of some of the proceeds available for the HECM loan to be used as a source for covering taxes and insurance.
A set-aside is practically the reverse mortgage equivalent of an escrow in a forward mortgage.
On a similar note, Lori Trawinski, senior strategic policy advisor for AARP Public Policy Institute, agreed that tax and insurance set-asides or escrows are important tools the FHA should consider to improve the HECM program.
Additionally, regulations are needed to ensure that consumers receive a loan that is best suited to their needs.
Thus, AARP believes the Consumer Financial Protection Bureau should promulgate rules that govern the type of loan a borrower winds up in.
"We urge Congress to require HUD to evaluate the HECM program every two years and to act expeditiously to implement changes to the program through the rulemaking process," Trawinski stated.
She concluded, "AARP supports the continuation of the HECM program and we look forward to working with Congress and other stakeholders to ensure that older Americans can tap their home equity with safe, affordable, government-insured reverse mortgage loans that enhance their ability to age in place."