Prior to an announcement by the Federal Housing Administration stating a moratorium will go into effect for its fixed rate standard reverse mortgage program, The Mortgage Professor, or Jack Guttentag, responded to the expected change in a column this week.
Doing away with the fixed rate standard product, he says, makes “no sense,” for the FHA’s purposes of shoring up its insurance fund problems.
The Mortgage Professor writes:
“Eliminating the fixed-rate standard HECM would not eliminate the ability of seniors to use all of their HECM borrowing power to draw cash. They could continue to do this with the fixed-rate Saver, which is identical except that the maximum cash withdrawal on the Saver is somewhat smaller while the upfront mortgage insurance premium is largely eliminated.
Viewed strictly as a way to reduce FHA deficits, elimination of the fixed-rate standard while leaving the fixed-rate Saver makes no sense. If the first is a loser for FHA, so is the second. While the Saver loans are smaller and therefore expected losses are smaller, the insurance premiums on the Saver are correspondingly smaller. The only financial benefit to FHA would occur from seniors who, because the fixed-rate standard is no longer available, elect to drop out altogether.
I would not expect many dropouts because the options remaining are far more attractive than anything else available to financially strapped seniors. Borrowers looking for the maximum cash draw can switch not only into the fixed-rate Saver, but also into the adjustable-rate standard, which would allow them to draw more than on the fixed-rate Saver. I doubt that the risk of rising interest rates would offset the attraction of larger cash draws.
If every borrower looking for the maximum cash draw who is shut out of the standard fixed-rate HECM swings to either the Saver fixed-rate HECM or to the standard adjustable-rate HECM, the expected impact on FHA’s net income would be zero. Indeed, it could be even worse if — as seems very likely — cash-out adjustable-rate HECMs pose a greater risk of loss to FHA than cash-out fixed-rate HECMs.
Guttentag suggests instead a calculated approach to encourage less risky borrowers and discourage more risky borrowers from taking out reverse mortgages under the HECM program.
Written by Elizabeth Ecker