With Obama Budget Incoming, How Will Reverse Mortgages Fare?

All eyes are on the president’s budget, due Wednesday, not the least of which include those vested in the housing industry and who work closely with the Federal Housing Administration. Reverse mortgages are among the key areas to watch, according to reports. 

President Obama’s budget will outline the need for funding allocations for the FHA in the year following an actuarial review of the agency’s insurance fund indicating it was more than $16 billion short in terms of its economic break-even point. As a proportion of that total, the reverse mortgage part of the fund was found to be short $2.8 billion. 

This could play out adversely for the reverse mortgage program in particular, according to a Bloomberg News report citing people familiar with agency discussions. 

“The budget will show that losses persist in particular in the FHA’s reverse-mortgage program, according to two people familiar with discussions at the agency who asked not to be named because the budget hasn’t been released,” Bloomberg reports. “The FHA backs 90 percent of such mortgages, which enable homeowners age 62 or older to withdraw equity and repay it only when their homes are sold. The FHA already has set some new limits on the program to rein in costs and could institute further caps on the amount of equity borrowers are able to withdraw, the people said.”

FHA in general may not need the bailout initially anticipated by housing industry experts and lawmakers, as recovery in home prices has taken root toward more stability in housing and the economy.  

“My expectation is that there will be mixed perspectives coming out of the president’s budget,” Mortgage Bankers Association President and Chief Executive Officer David Stevens, told Bloomberg in anticipation of the budget’s release. “It will likely show extremely healthy returns in terms of mortgages in the 2013 book. Nevertheless, I would not be surprised if it leaned in the same kinds of direction as the independent actuarial report.”

The budget will indicate whether FHA’s Home Equity Conversion Mortgage program will require a taxpayer subsidy toward its costs in the coming year. Last year’s budget indicated the program was expected to be cash flow-positive and would not require additional funding from the government. Previous years, however, required requests of $250 million for the program in fiscal year 2011 and $798 million in 2010 after the HECM program’s insurance fund began to be tracked separately from the overall MMI fund. 

FHA has made changes in the past resulting from the budgetary outlook including raising reverse mortgage insurance premiums, lowering principal limits and introducing the HECM Saver loan as a lower cost alternative for borrowers that would have less of a potential shortfall for FHA. 

The agency has raised forward insurance premiums a handful of times, most recently on April 1. 

The budget is expected to be released Wednesday morning, April 10. 

Read the Bloomberg News coverage.

Written by Elizabeth Ecker

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