Government insured reverse mortgages are changing in 2013 and the agency that manages the program says there are two directions that change can take.
The agency prefers to make “refined” changes that would limit the amount borrowers can withdraw upfront, implement a financial assessment, and possibly establish some type of escrow account.
The hope is such adjustments would limit the number of defaults caused by failure to pay taxes and insurance, which stand at an estimated 9%, according to a study from the Consumer Financial Protection Bureau this year.
In order to make those changes, HUD needs additional authority from Congress. Without such authority the agency would be forced to make “blunt” program changes that could end the HECM Standard fixed and seriously limit the amount borrowers can withdraw.
“We are in the process of drafting policies against both of those alternatives,” HUD Deputy Assistant Secretary Charles Coulter told RMD in a phone interview. “We are going to take a wait and see attitude to [determine] whether we get the flexibility to take the more refined approach.”
If the agency isn’t provided such authority, it will move forward with more significant program changes, Coulter said. That second approach, which is not preferred by HUD, would be a moratorium on the fixed standard product.
HUD needs to move relatively quickly after an independent audit of the Federal Housing Administration found the Home Equity Conversion Mortgage (HECM) insurance fund has a negative economic net worth of $2.8 billion. The Department of Housing and Urban Development needs to shore up the program to cover projected losses.
“We are working toward having drafts prepared for very early next year and we believe we will need to make a determination on which path to take by early in the first quarter,” Coulter said.
To address the near 70% proportion of fixed rate loans in the marketplace as well as the higher likelihood of those borrowers to enter into tax or insurance default on their loans, HUD is considering several measures including a financial assessment of borrowers, a cap on the full draw amount that can be taken, changes to principal limit factors and an escrow or set aside for tax and insurance.
Last week, HUD Secretary Shaun Donovan fielded questions from members of Congress on what is being done to shore up the reverse mortgage insurance fund and asked for the authority to implement the changes that have been discussed.
Senator Bob Corker (R-Tenn.) responded that the authority sounded reasonable, but a decision is pending the next term of Congress.
“We’re not suggesting that a fixed rate HECM loan is a bad loan,” Coulter said. “What we are suggesting is that the way the loan is being used today is not consistent with the intent of the overall program.”
HUD had stated that it prefers to make the calculated changes with these specific goals in mind rather than face more drastic program changes that would limit the product’s availability to seniors who need it.
“We all have a strong vested interest in ensuring this program serves borrowers consistently over the long term and having a program that is seniors to seniors and is economically viable,” Coulter said. “We need to work together toward that outcome.”
Written by Elizabeth Ecker