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Federal clampdown looming on reverse mortgages

Original source:

Mark Miller
December 5, 2012

The federal government is proposing to make big changes to its reverse mortgage program early next year that should make the loans safer for seniors who use them to tap home equity.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD), which regulates these loans, will detail policy options that would create more conservative lending standards in testimony later this week before the Senate Committee on Banking, Housing and Urban Affairs.

Change is needed. Reverse mortgages can serve as financial lifelines by helping seniors leverage their equity without selling their homes. But the private loan industry has shifted in recent years toward encouraging large up-front lump sums rather than smaller lines of credit. These are more risky for borrowers as well as for the federal government, which insures them through the Federal Housing Administration (FHA) insurance fund.

Unlike a traditional 30-year mortgage, where you make monthly payments that increase your equity, a reverse mortgage pays out the equity already in your home as cash; your debt level rises and equity decreases. The loans are available only to homeowners age 62 and above.

But the reverse loan market has faced growing problems in recent years -- the result of sinking post-crash home values and the industry's shift toward riskier loan structures. Lending through the federally administered Home Equity Conversion Mortgage (HECM) program was down 25 percent in the fiscal 2012 year ended September 30. Just 54,591 loans were issued -- the third straight year of falling loan volume and far below the peak year of 2009, when 115,000 loans were originated.

Reverse mortgages have come under increased scrutiny from federal regulators and loan underwriters. A critical study released earlier this year by the federal Consumer Financial Protection Bureau found that a growing number of outstanding loans are at risk of default. As of June this year, 9.8 percent of all active HECM loans were delinquent, according to HUD, which regulates the loans.

The most popular reverse loan is the HECM. Repayment typically is triggered when a homeowner dies or moves out permanently, and is typically funded through sale of the home. If the balance on an HECM is higher than the value of the home, the FHA makes up the difference through its Mutual Mortgage Insurance fund (MMI). The fund also is on the hook if a loan goes into default.

Reverse mortgage borrowers are not required to make monthly loan payments, but it is still possible to default. Loan terms typically require borrowers to continue paying property taxes, hazard insurance and any required maintenance on their property.

The market has swung dramatically in recent years toward loans that give borrowers large lump-sum payouts that carry high fixed rates of interest rather than annuity-style payments or lines of credit that carry lower adjustable rates. The proceeds tend to be spent in the early years of the loan, leaving households without sufficient cash flow down the road to keep up on required payments on taxes and home insurance. These loans are up to four times more likely to default than more conservative loans, according to HUD.

The MMI program is under financial stress because of the wider foreclosure crisis, but HECM defaults are generating losses at a much higher rate than traditional forward mortgages covered by the fund, according to HUD data.

Possible Solutions

HUD will pursue one of two avenues to address the problem, according to Charles Coulter, deputy assistant secretary of the FHA.

Its preferred approach, he says, is to get emergency authority from Congress to cap up-front loan draws at the greater of a fixed percent or "mandatory obligations" associated with the reverse loan -- closing costs and the retirement of mortgage liens or federal debt. At the same time, new safeguards would be added to ensure that borrowers are able to meet future tax, insurance and property maintenance obligations. These would include an assessment of creditworthiness and possibly an escrow requirement for taxes and insurance.

If Congress does not grant that authority, HUD will use its existing regulatory authority to discontinue fixed-rate loans in the standard HECM program, which currently allows homeowners to borrow up to $625,500. Instead, fixed-rate loans would be available only through the HECM Saver program, which has lower loan limits and fees.

In either case, the industry anticipates that borrowers will see changes in loan choices by the first or second quarter next year, according to Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA).

HUD is aiming to push the HECM market back toward loans that provide flexible lines of credit at adjustable interest rates.

"Seniors will need to rely on their homes as one of the mechanisms for sustaining themselves during retirement," Coulter said. "Reverse mortgages can help seniors age in place in cases where they don't have access to other liquid capital. We're just trying to get this program to operate more consistently with that statement than it is today."

HUD Secretary Donovan is scheduled to testify Thursday about the health of the MMI fund before the Senate Banking Committee and is expected to discuss the proposed HECM changes.

Reverse mortgage lenders will welcome the changes, according to the NRMLA's Bell.

"I think these are healthy changes that will address a handful of concerns that keep arising," Bell said. "There have been concerns that fixed-rate, full-draw loans are being taken out by people who should do otherwise. This will put a check and balance on that, and help the FHA with the mix of loans it's insuring from a risk standpoint."

(The writer is a Reuters columnist. The opinions expressed are his own. For more from Mark Miller, see