The U.S. House of Representatives passed a bill on Wednesday that would give new authority to the Federal Housing Administration to tighten terms for reverse mortgages, where it has faced significant losses.
Continue Reading Below
The FHA, which backs $1.1 trillion in U.S. home mortgages, is looking to shore up its finances in the face of a projected shortfall of $16.3 billion due, in part, to reverse mortgages that have gone into default.
The legislation would need to be approved by the Senate to take effect. If enacted, it would help shore up the FHA's most popular reverse-mortgage option that allows people 62 or older to take cash out of their homes. Under the program, seniors can convert their equity into cash by getting a large, upfront lump sum, monthly payments or a line of credit.
"Hundreds of thousands of seniors currently utilize federal reverse home mortgages. We need to act to stabilize the program," said Representative Denny Heck, a Democrat from Washington, who sponsored the bill with Representative Michael Fitzpatrick, a Pennsylvania Republican.
Borrowers still pay taxes and insurance on reverse mortgages, while payouts from home sales go to the lender when the borrower dies or moves.
The measure passed by the House allows the FHA to put in place new loan terms without following a rule-making process that normally takes months.
Continue Reading Below
The FHA would use the new authority to require financial assessments of borrowers' budgets to make sure they are suitable for the loan; to set up escrow accounts to ensure payment of taxes and insurance to avoid default for non-payment; and to limit the amount borrowers can take out as a lump sum up front.
The Senate has a companion bill, introduced by Senator Robert Mendedez, a New Jersey Democrat, but it has not yet considered the measure.
The FHA doesn't make loans, but instead insures lenders against losses. The agency has played a crucial role helping the housing market by supporting mortgages of borrowers who put little money down, and it back almost one-third of loans used to purchase homes.
Given its shaky finances, the FHA could be required to turn to the Treasury for a bailout. Whether or not it will require aid will be determined when the mortgage insurer reassesses its books when the fiscal year ends on Sept. 30.