Declining home values have put a serious squeeze on one of the mortgage market's most popular and fastest-growing financing concepts: the...
WASHINGTON — Declining home values have put a serious squeeze on one of the mortgage market’s most popular and fastest-growing financing concepts: the Federal Housing Administration’s reverse-mortgage program for people 62 and older.
In a letter to reverse-mortgage lenders Sept. 23, FHA Commissioner David Stevens said his agency must reduce the maximum amounts people can receive on reverse mortgages because of an estimated $798 million budgetary shortfall for the program in the coming fiscal year.
Industry sources said the move amounts to a 10 percent cutback for all new FHA reverse-mortgage applicants, starting this month. Borrowers who already have the reverse loans will not be affected.
Peter Bell, president of the National Reverse Mortgage Lenders Association, says the policy change could prevent more than one out of five applicants from paying off their existing mortgage debt with the proceeds of a new reverse loan.
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That, in turn, could leave some older homeowners in danger of falling into serious delinquency on their current loans, even ending up in foreclosure.
The total number of seniors affected could be in the tens of thousands, Bell said, because roughly 130,000 new loans are projected for fiscal 2010.
Dennis Ceizyk Sr., vice president of Heartland Mortgage, in Tucson, Ariz., says the move immediately impacts two of his company’s clients: a Phoenix couple in their late 70s who no longer can afford the monthly payments on their existing mortgage.
He says they had planned to take out a reverse mortgage yielding them $92,500 in cash on a house valued at $125,000. The $92,500 lump sum would pay off their $75,000 mortgage balance, plus closing and other transaction costs, leaving them approximately $6,000.
“They’d be able to get out from under their mortgage payments and have a little money in their pockets” while still remaining in their house, Ceizyk said. But under the FHA’s new rule, the $92,500 in initial proceeds would be reduced by $9,250 to $83,250 — not enough to pay off their loan and handle closing expenses.
Under a reverse mortgage — the official FHA name is Home Equity Conversion Mortgage — the lender typically provides homeowners with a lump-sum payment, monthly payments or an equity credit line.
The amounts paid to owners are secured by the equity in the house and become due and payable with interest when the owners sell the property or otherwise stop living in it. Borrowers are guaranteed the right to stay in their houses indefinitely, even if the debt balance exceeds the home’s value.
The FHA insures reverse mortgages made by approved lenders. In the event the loan balance approaches what the FHA calls the maximum claim amount against the property, the lender can assign the loan to the agency and be paid the balance owed.
Earlier this year, Obama administration budget officials told the FHA that, based on their projections of home-price movements during fiscal 2010, the reverse-mortgage program would need by Oct. 1 a subsidy of $798 million to cover a growing gap between estimated balances extended to borrowers and the property values backing them up.
The gap could be filled in one of several ways, budget officials said, including congressional appropriations, a reduction in principal amounts, or an increase in insurance premiums charged borrowers. Ultimately the agency chose to limit principal amounts.
In a statement, Stevens said, “We are taking steps to make certain the (reverse-mortgage) program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option.”
Reverse mortgages increasingly have been used as a financial-planning tool. Homeowners are often able to extinguish their mortgage debt — stop paying out hundreds or thousands of dollars a month — and convert their home equity into a cash resource or income stream. This is especially important for older homeowners on financial tightropes.
Though the 10 percent cutback may make things tougher for them during the coming year, Bell and others are working on plans to reduce the impact.
One idea, he said, is to allow the current lender to agree to accept less than a full payoff, given the diminished reverse-mortgage proceeds. The unpaid balances could be recast as junior liens secured by the property, repayable over an agreed-upon term of years, or in a lump sum with interest at the time of sale of the house.
Kenneth R. Harney: firstname.lastname@example.org