Published July 24, 2013
The federal government is getting ready for round two of the Great Reverse Mortgage Crackdown.
Earlier this year, the Department of Housing and Urban Development eliminated one of the most risky reverse mortgage programs - upfront lump-sum loans issued at fixed interest rates. Now, it is proposing to further discourage big lump-sum reverse mortgages by limiting the amount borrowers could get from variable rate loans, too.
HUD also wants to tighten things up by adding a feature you would expect to find when applying for any other type of major loan: an upfront financial assessment to determine the borrower's financial fitness to take on a reverse mortgage.
Reverse mortgages allow homeowners turn their equity - the value that is not mortgaged - into either an upfront lump-sum payment or a line of credit. Currently, any owner age 62 and older can qualify for a reverse mortgage if he or she has sufficient equity in the property.
Financial assessments of the homeowners have not been required because they do not have to make loan repayments during their lifetimes; repayment is triggered when a borrower dies or moves out permanently, and typically is funded through the sale of the home.
The most popular reverse loan is the Home Equity Conversion Mortgage program, which is administered by HUD and insured through the Federal Housing Administration. If the balance on an HECM is higher than the value of the home when the loan terminates, the FHA makes up the difference through its Mutual Mortgage Insurance Fund.
But it is possible for borrowers to default because the loan terms require them to continue paying property taxes, hazard insurance and any required maintenance on their properties. When a big lump-sum reverse mortgage gets spent in the early years of the loan, the borrower may not have the resources to make those payments.
"In some areas of the country, property taxes are very high, and hazard insurance is very expensive in coastal areas," says Lori Trawinski, senior strategic policy adviser at the AARP Public Policy Institute.
HUD is asking Congress for legislative authority to require borrowers to undergo financial assessments. A spokesman for the agency says the assessment would look at a potential borrower's free cash flow, credit score and obligations for property taxes, hazard insurance, homeowner association dues, utilities and other debt.
Borrowers with risky-looking financial profiles would have to set aside funds from the loan proceeds to cover their future tax and insurance obligations. HUD also is asking for authority to cap loan amounts at lower levels than are currently available for borrowers.
The housing crash in the last decade has put HUD under pressure to curb reverse mortgages. Long-term projections show the HECM portfolio faces $943 billion in potential losses on loans made when housing values were much higher. In theory, the FHA is on the hook to cover those losses.
"HUD is saying that (getting) emergency authority to make these changes by end of summer would let them avoid asking for an appropriation to bring the MMI fund's capitalization up to the appropriate level," AARP's Trawinski says.
HUD's actions make it clear that the HECM market is moving away from large lump-sum loans that borrowers can use to pay off other debts. That probably will push them toward the newer HECM Saver program, which tends to issue loans as lines of credit, with lower limits and fees.
Take the example of a 68-year-old homeowner with a property valued at $300,000 and no mortgage. A standard HECM with a variable interest rate could yield a lump sum loan of $185,000, net of $10,950 in fees, according to a calculator on lender All Reverse Mortgage's website. With a Saver HECM, the same borrower could access a $156,450 line of credit, net of $6,450 in fees.
Drawdowns from lines of credit, which are available for standard and saver HECMs, can be taken in unscheduled payments or in installments until the total credit is exhausted.
AARP supports some of the HUD's requested changes, such as the financial assessment and escrows for taxes and insurance. But the advocacy group for people 50 and older is urging a slower rulemaking process in which HUD would propose changes and take comments from the public.
AARP also is urging that the new Consumer Financial Protection Bureau, which has the power to regulate mortgages, establish standards to make sure consumers are matched up with the most appropriate loan products for them.
The odds of congressional action on HUD's proposals are uncertain. The House of Representatives already has passed a bill, but it is unclear whether the Senate will follow suit.
If the Senate fails to join in before the recess that begins in early August, HUD probably will eliminate variable rate lump sum loans altogether, said Peter Bell, president of the National Reverse Mortgage Lenders Association.
The HECM program may also get caught up in a broader debate about the role of the federal government in the mortgage market and the future of intermediaries Fannie Mae and Freddie Mac.
For more from Mark Miller, see http://link.reuters.com/qyk97s