AARP Blog: Big Reverse Mortgage Changes Could Impact Loan Appeal

February 14th, 2013 | by Elizabeth Ecker Published in News | 4 Comments

On the heels of changes announced by the Federal Housing Administration to its reverse mortgage program, AARP’s blog this week outlined what the changes—namely the suspension of FHA’s fixed rate standard option—mean for prospective borrowers.

Despite the changes being geared toward safer lending practices, the changes, which will restrict the amount borrowers can take upfront, AARP writes, could make the loans less desirable to borrowers.

AARP’s blog writes:

You just might find that big changes to the program make these loans less appealing.

Assistant Secretary for Housing Carol Galante says the Federal Housing Administration is taking “aggressive action” to shore up its future after the housing meltdown left it in financial straits. The nation’s reverse mortgage program alone lost $2.8 billion last year, she said in testimony before the House Financial Services Committee Wednesday.

So officials are implementing new rules, both now and in the future. Among the biggest change to the program is that borrowers will be restricted in the amount they can take up front and in a lump sum from the equity in their home. That’s because a hefty portion of those funds will be set aside to cover their annual taxes and insurance premiums in the future.

The federal action was taken after the number of reverse mortgage borrowers in default rose sharply last year. About one in 10 loans was delinquent and at risk for foreclosure, in large part because borrowers ran out of money and failed to pay their taxes and insurance.

About two-thirds of borrowers opt to take their proceeds in a lump sum rather than as a steady stream of monthly income over a period of years.

Read the full post at AARP.org.

Written by Elizabeth Ecker

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rmcounselor

Sure wish AARP would get its facts straight. They used to be a trustworthy source of information.
KatyDog

Let’s get smart and stop taxing seniors for school taxes and the foreclosure for HECM loans will disappear. We have already paid our debt to society, so please let us live the rest of our lives in dignity in a house we worked so hard to pay off.
wealthone

Yes, unfortunately someone must have had a deadline they had trouble meeting and missed some of the actual facts. Your rebuttal on the aarp site was very strong and accurate rmcounselor.
James_E_Veale_CPA_MBT

The blog links the following to the written testimony of Ms. Galante: “The nation’s reverse mortgage program alone lost $2.8 billion last year, she said in testimony before the House Financial Services Committee Wednesday.”

Compare the quotation to what Ms. Galante actually wrote: “The actuarial assessments estimate that the economic value of the Fund as of the end of FY 2012 is negative $16.3 billion against an active portfolio of $1.13 trillion. The economic value of the forward portfolio was estimated at negative $13.5 billion, the HECM portfolio at negative $2.8 billion.”

What Ms. Galante was discussing was the end of the year net position of the HECM portion of the MMI Fund while Ms. Fleck (the AARP blogger) is discussing the loss which incurred last fiscal year. In common financial and accounting terms both are wrong. While Ms. Galante is only guilty of using government speak to describe the net loss position of the HECM portion of the MMI Fund, Ms. Fleck is confused which is far, far worse.

The HECM portion of the MMI Fund suffered a $4.2 billion loss last fiscal year. That becomes easy to understand if one realizes that the net position was $1.4 billion positive as of September 30, 2011 and $2.8 billion negative as of September 30, 2012. Why it decreased so much was due principally to changes in valuation model and assumptions in determining the value of the entire group of HECMs endorsed after September 30, 2008.

AARP has a number of people who are very knowledgeable about HECMs who should have reviewed and edited what Ms. Fleck wrote. The worst part of the article was that she missed the real reason (variable) why the fixed rate Standard had to be terminated, projected values of collateral at termination.