Should FHA get out of reverse mortgages?
It’s been a busy time for the reverse mortgage industry. Not only did its biggest player — MetLife — announce it will no longer be accepting applications, but industry officials are lobbying the federal government to take on a larger role.
The Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Urban Development (HUD), is the country’s most popular reverse mortgage. There is a cap on the number of reverse mortgages the FHA is authorized to insure, and many agencies, including AARP, want the number raised.
Recently, at a congressional hearing devoted to FHA’s involvement, Lori Trawinski, senior strategic policy adviser for AARP’s Public Policy Institute, said AARP would like the limit removed.
“Loan limits were imposed when the HECM program was a pilot program,” Trawinski said. “The loan number cap has been raised several times over the years and has, at times, led to a halt in originations when the cap was reached. Lifting the statutory loan limit would be helpful in encouraging lenders to offer reverse mortgages and remain committed to this market.”
Charles Coulter, the deputy assistant secretary for the FHA single-family program, testified that HECM originations have been declining since 2009 due to increases in insurance premiums and reductions in the amount of equity take-out available to the borrower.
FHA endorsed 73,000 HECMs in 2011, compared to 115,000 in 2009. During the first half of 2012 (which ended March 31), FHA endorsed 29,000 HECMs, down 26 percent from the previous year.
So, why increase the cap when the number of loans is trending down? Some argue this would be a good time to remove some of the lending weight from FHA’s shoulders.
Three years ago, when money was tight and jumbo mortgages became so difficult to find, FHA became a sort of safety valve for many “forward” mortgage lenders. Some lenders reported that FHA loans made up nearly 40 percent of their business, nearly double the volume of the past five years combined. The agency was never conceived to be a go-to major player, but rather designed as a backup.
“I am not against reverse mortgages as an equity extraction tool,” said Anthony Sanders, professor of Real Estate Finance at George Mason University. “But I do not see any reason for the federal government to guarantee and subsidize it.
“At a minimum, the federal government should get out of the reverse mortgage insurance and subsidization business, particularly since there is an easy alternative: Seniors sell their home and buy a smaller dwelling or rent,” Sanders added.
While this discussion was going on, the National Reverse Mortgage Lenders Association (NRMLA) also floated the idea that a federal regulator craft a “qualified mortgage” rule specifically for private reverse mortgages. Such a rule would spell out the characteristics of reverse mortgages that could be originated and securitized without a risk-retention requirement, Peter Bell, NRMLA president and CEO, told a House panel.
“This will help bring back the proprietary reverse mortgage market, taking some of the burden off Federal Housing Administration in serving senior needs,” Bell testified.
It seems Bell might have been attempting to rejuvenate the jumbo reverse market while hedging his bet on the FHA cap at the same time. The reverse mortgage industry has been desperately seeking private money since all jumbo reverse mortgage money evaporated in 2008.
The only proprietary reverse mortgage now available is the Generation Plus Loan through Atlanta-based Generation Mortgage. It targets owners older than 62 with homes appraising between $500,000 and $6 million. Unlike the popular HECM offered by HUD, the jumbo reverse mortgage requires no mortgage insurance, but the interest rate on the program is higher.
The downside is that the Generation Plus Loan carries a fixed rate of 7.78 or 8.78 percent, depending on the program. All funds must be taken at closing and can be used for any purpose, including the purchase of an investment or retirement home at today’s bargain prices. A minimum FICO score of 700 is required.
A majority of seniors are better served by the HECM. Not only can customers receive the funds in a variety of ways (lump sum, monthly draw, line of credit or a combination), but the interest rate on that fixed-rate product at press time was hovering at 4.25 percent, plus the up-front mortgage insurance premium.
In a nutshell, we need both FHA-insured and private reverse mortgages. Seniors love the idea of a government-backed instrument, and some need a way to tap their high-equity properties. Many have held on and stayed put. They deserve to take their money out, safely.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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