FHA to Congress: Give Us Authority to Shore Up Reverse Mortgage Program

The Federal Housing Administration says it is committed to its reverse mortgage program and making it sustainable, but it can’t act without the help of Congress.

Housing Secretary Shaun Donovan said Wednesday following the release of FHA’s budget for fiscal year 2014 that the Home Equity Conversion Mortgage is largely to blame for FHA projected losses that could require a $943 million bailout from the Treasury, but that reform of the program will lead to its sustainability.

“If it were not for the HECM program, FHA would be in positive territory,” Donovan said. “It is very important to carry forward those reforms for HECM.”

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The administration remains committed to improving the program as a means for older homeowners to help pay for costs of living in retirement, Donovan said.

“There are some who say we should not have a reverse mortgage program. We believe the reverse mortgage program can be an important part of helping seniors responsibly use their home equity for health care and other needs. But only if it is responsibly done.”

FHA says the changes the changes being considered are limiting the maximum upfront draw available to borrowers, requiring the use of a financial assessment in making a HECM loan, mandating an escrow for mandatory property charges and a statutory change to clarify the rights and responsibilities of the non-borrowing spouse on a HECM loan.
But the agency is unable to make those changes until Congress grants the authority for it to do so.

The moratorium placed on the fixed rate standard reverse mortgage is a start to the changes that are needed, FHA said, but additional change must take place in fiscal year 2013, which ends September 30.

“We have to be in a position by the end of this fiscal year [September 30] so the program pays for itself,” Donovan said.

The 2014 budget projections indicate the reverse mortgage program is generating positive cash flow with current books of business maintaining a strong economic outlook on rising home prices and improvement in the economy.

Yet the past books of business will lead to $5 billion in losses in 2013 under the HECM program without program income to offset those losses, according to re-estimates of the program’s financial position cited by FHA. Positive revenue on forward loans will help to offset the losses, but still could amount to a shortfall in the measure of more than $900 million. Such a “bailout” is possible, but not a certainty, Donovan said, noting $30 billion in FHA reserves.

“No final determination on whether we need to draw will be made until October 1,” he said.

Written by Elizabeth Ecker

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  • Why has it taken FHA more than two decades to ask Congress to revise subsection (j) of the statute dealing with displacement of borrowers and their SPOUSES? Some accuse the legal department at HUD of being just that arrogant. Some say that the HUD legal staff does not see that HUD has to implement the law the way it is written. After their inexcusable delay since the AARP lawsuits, one wonders if “arrogant” is not appropriate. Finally HUD is answering responsibly to the issue.

    Are these escrow accounts for funding at the time the HECM is originally funded, are they to receive payments from borrowers throughout the loan, or are they for both. It would be genuinely irresponsible to escrow monies for taxes and insurance at funding when that can be done through set asides just as easily. Since interest on escrowed monies pay so little, generally seniors will be in a loss earnings arbitrage situation since accruing costs on those same escrowed funds will be higher than the interest being earned on the escrowed monies. Donovan provides absolutely no light on the issue.

    Clamping down on payouts for the first year or so seems reasonable if there are lenient exceptions. Financial assessment can be a disaster or if designed along the lines of the NRMLA recommendations a genuine help.

  • Housing Secretary Shaun Donovan said Wednesday following the release of FHA’s budget for fiscal year 2014 that the Home Equity Conversion Mortgage is largely to blame for FHA projected losses that could require a $943 million bailout from the Treasury. Is this the new truth from CFPB/FHA? Weren’t we told that only $2.8 billion was attributable to the HECM loan defaults that challenge the reserve account? What will be the truth tomorrow? No wonder Congress is wary of FHA fixes.

    • Mr. Strycker,

      What do defaults have to do with the current negative net position of the HECM portion of the MMI Fund? Yes, some industry leaders still do not understand the difference but FHA, really? You need to get your story straight. Your ducks are not in a row. Please point to one single presentation by FHA which backs up your story.

      The sad fact is a significant portion of the HECM borrowers in default for nonpayment of property charges have equity. They simply lack the cash to pay those charges and having a HECM interferes with their ability to obtain financing on the remaining “current” equity.

      HECMs (and thus FHA) are solely to blame for the $943 overall negative net position of the MMI Fund which the Secretary points to. Other than the HECM portion of that program, the other programs appear to be healthy, despite pulling out over $2.2 billion from those programs to make the HECM portion look better during fiscal 2010 and 2011. As of yet none of those funds have been returned to the other programs.

      What is the principal cause this massive losses in the HECM portion of MMI Fund, fixed rate HECMs whether coming from traditional or purchase transactions. While it may have been over 54 months too late, Mortgagee Letter 2013-01 at least cut that nonsense off.

  • Warren,

    What do defaults have to do with the current negative net position of the HECM portion of the MMI Fund? Yes, some industry leaders still do not understand the difference but FHA, really? You need to get your story straight. Your ducks are not in a row. Please point to one single presentation by FHA which backs up your story.

    The sad fact is a significant portion of the HECM borrowers in default for nonpayment of property charges have equity. They simply lack the cash to pay those charges and having a HECM interferes with their ability to obtain financing on the remaining “current” equity.

    HECMs (and thus FHA) are solely to blame for the $943 overall negative net position of the MMI Fund which the Secretary points to. Other than the HECM portion of that program, the other programs appear to be healthy, despite pulling out over $2.2 billion from those programs to make the HECM portion look better during fiscal 2010 and 2011. As of yet none of those funds have been returned to the other programs.

    What is the principal cause this massive losses in the HECM portion of MMI Fund, fixed rate HECMs whether coming from traditional or purchase transactions. While it may have been over 54 months too late, Mortgagee Letter 2013-01 at least cut that nonsense off.

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