September 4, 2013

Changes to Reverse Mortgages Will Protect Consumers

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HUD has a long history of helping our nation’s seniors find quality, affordable housing.  With the help of initiatives like our Section 202 housing and Assisted Living Conversion Programs (ALCP), we make sure to set aside some of our housing assistance resources for our most vulnerable elderly populations – promoting their independence and inclusion in communities across the country.  Lately we’ve been speaking a lot about a core FHA program that supports seniors: the Home Equity Conversion Mortgage (HECM).

HECMs help seniors remain financially secure by giving them access to the equity that has accrued in their homes at a time when their income is likely to be reduced—by retirement or limited hours—or strained—by higher medical expenses and the increased cost of living.  When used responsibly, HECMs help seniors maintain their quality of life and independence.

Since 2009, we have taken decisive and aggressive action to protect and improve the Fund across all programs, and as a result, are seeing positive trends in the portfolio.      However, the FY 2012 review of the portfolio indicated that HECM loans—as a result of the financial crisis, changing demographics, and new usage trends—might experience higher levels of default in the coming years.  And that would hurt elderly homeowners, the Mutual Mortgage Insurance (MMI) Fund, and taxpayers.

But rather than end an effective program that seniors rely on, in November 2012 we appealed to Congress, asking for the ability to make critical changes quickly and clearly – through Mortgagee Letters.   With this legislation passing both houses of Congress with bipartisan support, it is clear that the financial well-being of our nation’s seniors as well as the fiscal security of the MMI Fund are priorities shared by both parties.

Last month, the President signed HR 2167 – “The Reverse Mortgage Stabilization Act of 2013” – giving FHA the authority to make necessary changes to the HECM program – reducing our risk and making the program easier for seniors to use responsibly.   As a result, yesterday FHA was able to issue a Mortgagee Letter making some critical, structural changes to the HECM program.

1)      FHA will limit the amount of money that can be drawn at closing, as well as subsequent draws during the first 12 months, which will help seniors make more responsible financial choices, preserving sufficient funds over the life of the loan.

2)      FHA will institute a financial assessment before granting loan approval so that borrowers demonstrate their ability to meet all their housing obligations, like taxes, insurance, and maintenance.  This will reduce default rates and make sure that these loans are a sustainable solution for seniors.

3)      FHA will require set asides for payment of property taxes and insurance out of line of the credit or tenure/term payments for some borrowers, based on the results of the financial assessment.

Using our existing authority, FHA will also issue new Principal Limit Factor Tables and increase initial mortgage insurance premiums on disbursements, to more appropriately price for risk associated with these loans.

These changes will improve the future performance of the Fund, and help preserve a program that allows seniors to remain productive, vital members of their communities.  Most importantly, these changes mean that seniors who choose HECM will be set up for financial success.  And whenever we reduce risk to the fund while making it easier for borrowers to make responsible financial choices – we all win.

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