By September 30, 2013 0 Comments Read More →

How The FHA Can Fix Its Reverse Mortgage Woes

The FHA reverse mortgage program is in trouble again, but as usual the wrong party is being blamed.

In a letter to Congress FHA Commissioner Carole Galante says the FHA needs $1.7 billion in taxpayer dollars, in large measure because of losses on the reverse mortgages it insures.

None of this is a surprise. To understand why let’s look at reverse mortgages.

Usually when we finance a house we get a loan and then repay it over a period of years. This means that each month the size of the debt is reduced a process called amortization. Between amortization, rising prices and the borrower’s down payment mortgage insurance programs such as the FHA, VA and private mortgage insurance (MI) have had relatively few claims.

With a reverse mortgage what happens is different. The borrower takes out a loan and makes no monthly payments for principal or interest — the loan is simply a giant, negatively amortizing debt. It gets bigger every month.

So how is a reverse mortgage repaid? When the property owner moves, dies or sells the proceeds from the sale are used to satisfy the debt. Importantly, with a reverse mortgage the liability of the borrower is limited to the value of the property, meaning it’s a non-recourse loan.

FHA Reverse Mortgages

The typical reverse mortgage is outstanding six years and home prices today are lower than they were a few years ago. So, if you insure a lot of reverse mortgages you have big losses — in the case of the FHA that’s about $5 billion.

If the FHA were not a government program it would have long ago left the reverse mortgage business — that’s what most private-sector companies have done. Instead, the government continues to insure such loans despite sure losses.

Who benefits from reverse mortgages?

Well, certainly, borrowers age 62 and above are happy to have access to their equity.

But there is also another group of beneficiaries: Reverse mortgage lenders love the product because they get fees up front and have no losses. That’s because the FHA provides a 100-percent guarantee to lenders: no matter how big the short-fall when a reverse mortgage ends the government will make-up any short-fall.

What is the solution to the reverse mortgage quandary?

How about having lenders taking a 5 percent stake in each reverse mortgage they make? You can bet without 100-percent insurance that reverse mortgage lending will become very conservative — and losses will rapidly fall.

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