Congress may be dysfunctional and highly partisan, but its members do have a soft touch when it comes to seniors and their access to reverse mortgages.
That is about the only way to explain how a bill designed to fix the troubled Federal Housing Administration reverse mortgage program was approved by the House of Representatives by voice vote. And the bill, sponsored by Rep. Denny Heck, D-Wash., was approved by unanimous consent in the Senate.
Just one of the 100 senators could have objected and killed the bill. But that didn’t happen. The Reverse Mortgage Stabilization Act was passed and sent to the White House for the president’s signature.
The bill (H.R. 2167) directs the Department of Housing and Urban Development to take certain actions to stem losses on FHA reverse mortgages, which are called home equity conversion mortgages.
Too many seniors with FHA-insured HECMs are failing to meet their obligations to pay their property taxes and homeowners insurance, which is leading to technical defaults and losses to the FHA insurance fund.
Too often seniors took out a HECM loan and tapped all their equity at once. Once those funds were exhausted, they got into financial trouble.
Earlier this year, HUD placed a moratorium on the standard fixed-rate HECM product which required seniors to take all their equity in one lump sum at closing. It was a very popular product and some seniors even used it to pay off their existing mortgage to prevent foreclosure.
To correct this, H.R. 2167 requires lenders for the first time to conduct financial assessments to ensure a HECM loan is the right product for the senior. It allows FHA to set limits on a first draw on a new HECM loan and require escrow accounts or set- asides for property taxes and homeowners insurance, if necessary.
If a senior fails the financial assessment, “a set-aside might be a mitigating factor so the senior can qualify for a HECM,” according to Peter Bell, president and chief executive of the National Reverse Mortgage Lenders Association.
“We have made recommends to HUD. It remains to be seen what they come up with,” Bell said.
Importantly, the reverse mortgages bill authorizes HUD to implement the reforms quickly via mortgagee letter, as opposed to going through a long regulatory rulemaking process.
“We are looking at issuing mortgagee letters by the end of August,” a HUD spokesman said. Ideally, HUD wants lenders to implement the changes by Oct. 1, the start of the federal government’s fiscal year.
“However, FHA will take care to ensure it and the industry has sufficient time for an operationally responsible implementation,” the spokesman said.
By passing H.R. 2167, Congress prevented HUD from taking more drastic actions to stem losses.
HUD was prepared to place a moratorium on the Standard variable-rate HECM product. That would have left seniors with only two reverse mortgage options—the fixed-rate HECM Saver and the variable-rate HECM Saver.
The Saver products have lower upfront costs than the remaining Standard HECM product. But the Standard product has a larger pay out than the Saver products.
The new law will allow FHA to limit the initial draw on the fixed-rate Standard, and require a set-aside to cover payments for insurance and taxes for two or more years if necessary.
Hopefully, this will reduce the number of technical defaults.
The National Reverse Mortgage Lenders Association and consumer groups supported giving HUD the authority to craft these changes.
“This legislation gives them the authority to use HUD’s experience to make changes that will better meet the needs of borrowers,” Bell said.
