Saying it’s losing money on reverse mortgages, the U.S. Department of Housing and Urban Development announced Tuesday, Aug. 29, it will increase up-front fees and tighten limits for the program starting in September and October to avoid having to dip into the U.S. Treasury to cover troubled borrowers.
The reforms, announced during a morning conference call, are designed to stem losses totaling $11.7 billion since fiscal year 2009 to the Federal Housing Administration, which insures reverse mortgages, a loan available to homeowners age 62 and over. Due to these losses, reverse mortgages have become a drag on the FHA insurance program, called the Mutual Mortgage Insurance Fund, the agency said.
“Quite simply, the (reverse mortgage) program is losing money and can no longer remain viable in its present form,” a HUD fact sheet released Tuesday said. “Today, younger, lower-income homeowners with traditional FHA-insured ‘forward mortgages’ are routinely bailing out the (reverse mortgage) program through the mortgage insurance premiums they pay, placing a significant burden on the overall health of FHA’s Mutual Mortgage Insurance Fund.”
Reverse mortgages are a special loan designed to help senior homeowners bridge gaps in their retirement savings by tapping into the “equity” stored up in their properties. Equity is the value of their homes over the amount owed on existing home loans.
Unlike traditional forward mortgages, borrowers don’t have to make monthly payments under a reverse mortgage, but rather draw cash from the lender either monthly, in a lump sum, as a line of credit or by some combination of the three. California leads the nation in FHA-insured reverse mortgages issued from 2009-16, HUD reported, followed by Florida, New York and Texas.
Loans issued under the 30-year-old program mushroomed in the mid-2000’s because reverse mortgages traditionally were easier to qualify for than traditional forward mortgages. But the FHA has been reacting to a series of losses under the program.
In November, HUD reported that the economic value of its reverse mortgage insurance fund fell to a negative $7.7 million in fiscal year 2016, down from a positive value of $6.8 billion a year earlier. The agency reported also that just over 89,000 of the 642,000 existing FHA-insured reverse mortgage borrowers were a year or more behind on property tax or insurance payments. Those borrowers, HUD concluded, are at risk of foreclosure.