FHA Threatens to Cut Reverse Mortgage Draws

FHA commissioner Carol Galante is urging Congress to act quickly and approve legislation that allows her agency to implement needed reforms to its troubled reverse mortgage program.

Unless Congress passes a FHA Home Equity Conversion Mortgage reform bill before the August recess, Galante told senators Wednesday FHA will have to take drastic actions by the end of September to lower the amount all borrowers can receive from a HECM loan.

The commissioner urged members of the Senate Banking Committee to approve a House-passed HECM bill (H.R. 2167) which is currently pending before the Senate. Supporters of the House measure are hoping the Senate will approve the HECM bill by unanimous consent.

The House-passed bill allows FHA to regulate its HECM program by mortgagee letter so it can require lenders to perform financial assessments of borrowers. These assessments will ensure they have the wherewithal to meet their obligation to pay homeowners insurance and property taxes going forward. In some cases, FHA will restrict the amount of equity the borrower can take on the first draw.

If Congress fails to pass the HECM reform bill, FHA will have to “substantially lower the amount everybody across the board” can take out on a reverse mortgage, Galante testified, “which is going to make it a much less effective program.”

Sen. Robert Menendez, D-N.J., has sponsored a HECM reform bill that is similar to the House bill. Menendez noted that he would try to get the House to accept his bill, which has yet to be approved by the Senate.

During her testimony, Galante stated that FHA has no intention of restarting the fixed-rate standard HECM product, which was a favorite with lenders and required borrowers to take out all their equity in one lump sum at closing.