Basing reverse mortgage policy changes on the recent actuarial report that found the Federal Housing Administration’s finances to be well into the red would be a mistake, writes Jack Guttentag, a.k.a. The Mortgage Professor in column this week.
The report, while it holds merit, includes assumptions based on changing forecasts that vary from year to year. Further, while there are fixes needed in the FHA’s home equity conversion mortgage program, they may not be the changes FHA is targeting currently.
…The critical problem of the HECM is that it attracts too many borrowers with short time horizons and poor payment habits, looking for as much cash in hand as possible, who impose heavy costs on FHA’s insurance reserve fund. And it is not attracting enough borrowers who need steady financial help to stay in their homes during their retirement years, or who will have intermittent needs over extended periods. The HECM program was designed to serve the second group, which also imposes much lower costs on the reserve fund than the first group.
…The standard fixed-rate option can be criticized for providing an incentive to exhaust all borrowing power at the beginning, attracting those who are most shortsighted, and encouraging others to become shortsighted.
This is inconsistent with the major objective of the HECM program, which is to help seniors stay in their homes by providing funding during their retirement years — not concentrated at the outset of retirement. Allowing seniors to withdraw it all upfront leaves nothing to withdraw later on when needs may be greater.
Losses to FHA on fixed-rate cash-out loans are much higher than those on HECMs that fund over time. Equity depletion is greater in the early years, which can discourage maintenance and encourage property tax defaults.
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