Fixed-rate program eliminated â€” making reverse mortgages less risky for government, less lucrative for homeowners
Youâ€™ve probably seen the reverse mortgage pitchmen at work on your TV screen â€” former Sen. Fred Thompson and actors Robert Wagner and Henry â€œFonzieâ€ Winkler prominent among them â€” urging seniors to pull cash out of their homes through a loan program guaranteed by the federal government. But it looks like the pitchmen will have fewer and smaller mortgages to sell in 2013. In a move aimed at controlling losses to its insurance funds, the Federal Housing Administration (FHA) is clamping a moratorium on the most popular form of reverse mortgage â€” the so-called â€œstandardâ€ version, which allows large lump-sum drawdowns of cash at fixed interest rates.
The agency also plans to institute other changes that could make obtaining a reverse mortgage tougher for some applicants, such as financial qualification standards and escrow set-asides for taxes and property insurance. Reverse mortgages are marketed to seniors 62 and older, can play important roles in retirement planning and enable owners to â€œage in placeâ€ â€” stay in their homes for as long as they want.
Unlike other mortgages, reverse loans do not require periodic repayments of principal and interest; borrowers generally need not repay the amounts drawn down until they move out or otherwise sell the property. The FHA supports the dominant program in the field, known as the â€œHome Equity Conversion Mortgageâ€ (HECM), which insures private lenders against loss and accounts for more than 90 percent of all new and outstanding reverse loans in this country.
FHAâ€™s program grew rapidly in volume from 2001 onward, producing 108,000 new loans in 2007, 112,000 in 2008 and 115,000 in the peak year of 2009. Since then, however, volumes have been sagging. Major lenders such as Bank of America, MetLife, Wells Fargo and Citibank have stopped originating new HECM loans altogether. Total originations sunk to 54,800 in the past fiscal year ending in September, according to federal data.
But shrinking volume hasnâ€™t been the only problem. The HECM program has been racking up outsized losses for FHA, in part attributable to foreclosures on homes whose market values have fallen below the insured amounts provided to the borrowers. In FHAâ€™s annual independent audit report to Congress, losses on reverse mortgages contributed $2.8 billion to the agencyâ€™s capital reserve deficiency and increased the chances that FHA might have to seek a bailout from the Treasury next year.
Congressional critics of the agency consider the reverse mortgage performance scandalous. During a Capitol Hill hearing earlier this month, Sen. Bob Corker, R-Tenn, told Housing and Urban Development Secretary Shaun Donovan: â€œYou are losing your shirt on reverse mortgages. Losing your shirt. â€¦ You have got mortgage brokers out there that are making an absolute fortune right now [off reverse mortgages]. â€¦ Some of them are good operators. A lot of them are schlocky operators. And I do not understand why you do not shut the program down.â€
Within days, thatâ€™s pretty much what Donovan, whose department runs the FHA, decided to do. In a letter Dec. 18 to Corker, acting FHA commissioner Carol J. Galante announced plans for an â€œimmediate cessationâ€ of the standard fixed-rate version of the program. The moratorium will not shut down all forms of FHA-backed reverse mortgages. Borrowers will still be able to use a version known as the â€œSaver,â€ which entails smaller maximum drawdowns and lower upfront fees, plus there are adjustable-rate options as well. None of them comes close to producing the volumes generated by the standard program, and FHA officials confirm that they expect the number of new reverse mortgages insured next year to decline further.
The fixed-rate Saver is likely to be the alternative of choice in 2013 for many borrowers. In an interview, Charles Coulter, deputy assistant secretary at FHA, said the Saver program offers 10 percent to 15 percent less in maximum drawdowns, depending on the age of the borrower. A comparison of the standard plan and the Saver prepared by Compass Point Research and Trading LLC, an investment advisory firm, estimated that on a home valued at $200,000, a 68-year-old borrower paying a 5 percent fixed interest rate would be able to pull out $130,400 using the standard program, but only $108,600 under the Saver plan.
Bottom line: FHA-insured reverse mortgages for seniors wonâ€™t be disappearing in 2013. But they wonâ€™t offer as much cash, and may be tougher to obtain if FHA imposes new rules designed to cut its losses.
Kenneth R. Harney is a syndicated real estate columnist.
By Kenneth R. Harney