The Nation's Housing
Reverse Mortgages Feel the Squeeze
Declining home values have put a serious squeeze on one of the mortgage market's most popular and fastest-growing financing concepts: the Federal Housing Administration's reverse mortgage program for people 62 and older.
In a letter to reverse-mortgage lenders Sept. 23, FHA Commissioner David H. Stevens said his agency must reduce the maximum amounts seniors can receive on reverse mortgages because of an estimated budgetary shortfall of $798 million in the program for the coming fiscal year.
Mortgage industry representatives said the move amounts to a 10 percent cutback for all new FHA reverse-mortgage applicants starting Oct. 1. Borrowers who already have FHA reverse loans will not be affected.
Peter Bell, president of the National Reverse Mortgage Lenders Association, says the policy change could prevent more than one out of five applicants from paying off their existing home mortgage debt with a new reverse loan. That could leave some senior homeowners in danger of falling into serious delinquency on their current loans, even ending up in foreclosure. The number of seniors affected could be in the tens of thousands, Bell said. Dennis Ceizyk Sr., vice president of Heartland Mortgage in Tucson, says the move immediately affects two of his company's clients -- a Phoenix couple in their late seventies who no longer can afford their existing mortgage. They had planned to take out a reverse mortgage yielding $92,500 in cash on a house valued at $125,000. That would pay off their $75,000 mortgage balance, plus closing and other transaction costs, leaving them about $6,000.
"They'd be able to get out from under their mortgage payments and have a little money in their pockets" while still remaining in their house, Ceizyk said. But under the FHA's new rule, the $92,500 in initial proceeds would be reduced by $9,250, to $83,250 -- not enough to cover their loan and closing expenses.
Under a reverse mortgage -- the official FHA name is "home equity conversion mortgage" -- the lender typically provides senior homeowners a lump-sum payment, monthly payments or an equity credit line. Amounts paid to owners are secured by home equity and become due with interest when the owners sell the property or otherwise cease using it as their residence. Borrowers are guaranteed the right to remain in their houses indefinitely, even if their debt exceeds the property's value.
In the event that the loan balance approaches what the FHA calls the maximum claim amount against the property, the lender can assign the loan to the agency and be paid the balance owed. Earlier this year, Obama administration budget officials told the FHA that, based on their projections of home price movements during fiscal 2010, the reverse-mortgage program would need a subsidy of $798 million by Oct. 1 to cover a widening gap between estimated balances extended to borrowers and the property values backing them.
The gap could be filled in one of several ways, budget officials said, including congressional appropriations, a reduction in principal amounts or an increase in insurance premiums charged to borrowers. Ultimately, the agency chose to limit principal amounts.
Stevens said in a statement that "we are taking steps to make certain the [reverse mortgage] program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option."
Homeowners are often able to extinguish their mortgage debt -- stop paying out hundreds or thousands of dollars a month -- and convert their home equity into cash resource or an income stream.
Bell and others are working on plans to reduce the impact on borrowers. One idea, he said, is to allow seniors' current lenders to agree to accept less than a full payoff, given the diminished reverse mortgage proceeds available. The unpaid balances could then be recast as junior liens secured by the property, repayable over an agreed-upon term of years, or in a lump sum with interest at the time of sale of the house.
Kenneth R. Harney's e-mail address is email@example.com.