WASHINGTON — Declining home values have put a serious squeeze on one of the mortgage market's most popular and fastest-growing financing concepts: the Federal Housing Administration's reverse mortgage program for those 62 and older.
In a letter to reverse mortgage lenders on Sept. 23, FHA commissioner David H. Stevens said his agency must reduce the maximum amounts seniors can receive on reverse mortgages because of a $798 million estimated budgetary shortfall for the program in the coming fiscal year.
Mortgage industry officials said the move amounts to a 10 percent cutback for all new FHA reverse mortgage applicants. Borrowers who already have FHA reverse loans will not be affected.
Peter Bell, president of the National Reverse Mortgage Lenders Association, says the policy change could prevent more than one in five applicants from paying off their existing home mortgage debt with the proceeds of a new reverse loan. That, in turn, could leave some homeowners in danger of falling into serious delinquency on their current loans, even ending up in foreclosure. The total number of seniors affected could be in the tens of thousands, Bell said, since roughly 130,000 new loans are projected for fiscal year 2010.
Dennis Ceizyk Sr., vice president of Heartland Mortgage Inc. in Tucson, Ariz., says the FHA's move immediately affects two of his company's clients — a Phoenix couple in their late 70s who no longer can afford the monthly payments on their existing mortgage. They had planned to take out a reverse mortgage yielding them $92,500 in cash on a house valued at $125,000. The $92,500 lump sum would pay off their $75,000 home mortgage balance, plus closing and other transaction costs, leaving them about $6,000.
"They'd be able to get out from under their mortgage payments and have a little money in their pockets" while remaining in their house, Ceizyk said. But under the FHA's new rule, the $92,500 in initial proceeds would be reduced by $9,250 to $83,250 — not enough to pay off their loan and handle the combined closing expenses.
Under a reverse mortgage — the official FHA name is Home Equity Conversion Mortgage — the lender typically provides senior homeowners with a lump-sum payment, monthly payments or an equity credit line. The amounts paid to the owners are secured by the equity in the house, and become due and payable with interest when the owners sell the property or otherwise cease using it as their residence. Borrowers are guaranteed the right to remain in their houses indefinitely, even if their debt balance exceeds the property's value.
The FHA insures reverse mortgages made by approved lenders. In the event the loan balance approaches what the FHA calls the maximum claim amount against the property, the lender can assign the loan to the agency and be paid the balance owed. Earlier this year, Obama administration budget officials told the FHA that, based on their projections of home price movements during fiscal 2010, the reverse mortgage program would need by Oct. 1 a subsidy of $798 million to cover a widening gap between estimated balances extended to borrowers and the property values backing them.
The gap could be filled in one of several ways, budget officials said, including congressional appropriations, a reduction in principal amounts or an increase in insurance premiums charged borrowers. Ultimately the agency chose to limit principal amounts.
FHA commissioner Stevens said in a statement that "we are taking steps to make certain the (reverse mortgage) program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option."
Reverse mortgages increasingly have been used by seniors as a financial planning tool. Homeowners are often able to extinguish their mortgage debt — stop paying out hundreds or thousands of dollars a month — and convert their home equity into a cash resource or income stream. This is especially important for seniors who are on financial tightropes.
Though the new 10 percent cutback may make things tougher for them during the coming year, Bell and others are working on plans to reduce the impact. One idea, he said, is to allow seniors' current lenders to agree to accept less than a full payoff, given the diminished reverse mortgage proceeds available. The unpaid balances could then be recast as junior liens secured by the property, repayable over an agreed-upon term of years, or in a lump sum with interest at the time of sale of the house.
Ken Harney can be reached at firstname.lastname@example.org.