HUD shifted $534 million from the Federal Housing Administration insurance fund to shore up the Home Equity Conversion Mortgage program in May 2011, but the latest independent audit of the HECM initiative found the economic value of reverse coverage is a negative $2.9 billion.
Due to the housing bust and the painfully slow economic recovery, more seniors turned to reverse mortgages as an economic lifeline.
Now, FHA is finding that many have exhausted their resources and can no longer afford to pay property taxes and homeowners insurance. These “technical” defaults can lead to foreclosures. The reputational risk of foreclosing on seniors prompted several large banks to exit the HECM program in 2010, including some of the largest funders, Wells Fargo and JPMorgan Chase.
The latest figures from HUD show 57,500 seniors in technical default as of June 30 with 60% participating in repayment plans to pay off their T&I debt. In fiscal year 2012, HECM servicers conveyed at least 11,000 REO properties to FHA, more than double the number of conveyances in FY 2010.
HUD secretary Shaun Donovan is urging Congress to quickly pass an emergency measure that allows FHA to restructure its most popular HECM product that allows seniors to take out a large lump sum at closing. The payout ranges from 62% to 77% of the appraised value of the property.
FHA charges a 2% upfront fee on fixed-rate, standard HECMs, but the loan is still an easy to sell to seniors. (It’s a highly profitable product for lenders who securitize the loans through Ginnie Mae.)
With congressional authorization, HUD would immediately reduce the maximum payout on the standard HECM. Lenders would be required to conduct a financial assessment to determine how much money the borrower actually needs and limit the initial draw accordingly.
Lenders would also have to evaluate the borrower’s capacity to pay taxes and insurance going forward and make sure they have enough to live on. If needed, a reserve could be set aside for taxes and insurance payments.
Some HECM borrowers are abandoning their homes because they cannot afford to make major repairs on their homes.
At a recent Senate Banking Committee hearing, Donovan urged senators to act quickly so FHA can restructure HECM products by issuing new guidelines, instead of going through a lengthy and time-consuming rulemaking process.
“These changes will protect the FHA from losses and reduce the likelihood of borrower defaults due to nonpayment of property taxes and insurance,” Donovan testified.
Sen. Bob Corker, R-Tenn., urged the secretary to impose a moratorium on the standard HECM product. “You are losing your shirt,” Corker said.
Donovan said a moratorium would hurt some seniors who did not want to take that option away entirely.
“Our preference” is to restructure the “program to make it more effective and safe. That would be better a way,” the HUD secretary testified. (Corker said he would be willing to work with Donovan on finding a legislative solution.)
HUD’s strategy is to encourage more seniors to use its HECM Saver product by reducing the payout on the fixed-rate standard HECM while maintaining the 2% upfront fee.
The HECM Saver currently has a maximum payout of 51% to 61% and a minimal 0.01% upfront fee.
But instead of a receiving lump-sum payout, the Saver is essentially a home equity line of credit. FHA introduced the HECM Saver several years ago but it hasn’t caught on with lenders or seniors.
In FY 2012, FHA lenders originated 48,000 standard fixed-rate HECMs and just 3,800 HECM Savers.
FBR Capital Markets analyst Edward Mills said it is important to reform the FHA reverse mortgage now to get ready for the baby boomers. “There is going to be a massive increase in the eligible population for HECMs,” he said.
Roughly 45 million baby boomers are alive today with 32 million owning a home, according to a recent Consumer Financial Protection Bureau report. “As of 2009, the median home equity for baby boomer households was $108, 000,” the CFPB report says.