Following approval in the House of Representatives in June, the Senate late Tuesday approved the Reverse Mortgage Stabilization Act, which gives the Department of Housing and Urban Development (HUD) authority to modify the Federal Housing Administration's (FHA) reverse mortgage program (also known as the Home Equity Conversion Mortgage or HECM program) in order to stem losses.
The FHA is facing up to $5 billion in reverse mortgage losses this year and may need a bailout totaling up to $1 billion in order to shore up its reserves. The FHA incurred the bulk of the losses when millions of homeowners took out reverse mortgages, opted to take lump sum payments and then ran into financial problems. The agency, which is required by law to maintain reserves equal to 2% of its portfolio, currently has about $32 billion in reserves.
The FHA-backed legislation will likely need to be reconciled with a similar bill introduced in the Senate by Sen. Robert Menendez, D-N.J. The HECM Stabilization Act of 2013 would require a more thorough financial assessment of borrowers, restrict the utilization of principal, and increase tax and insurance fees on the loans in order to protect the FHA from further losses that will ultimately be borne by taxpayers.
The FHA has until Sept. 30 to decide whether it will need a bailout from the Treasury, which would not require congressional approval. Should that happen, it would be the first bailout for the agency in its 79-year history.
In an effort to increase revenue, the FHA recently increased its mortgage insurance premiums and started requiring most borrowers to carry the insurance for the duration of their 30-year loans.
It is important to note that the Reverse Mortgage Stabilization Act does not prescribe steps to stem the FHA's losses; rather, it would give HUD the rulemaking authority it needs in order to make adjustments to the program.
‘HUD officials have been responsive and responsible administrators of the federal HECM program since it was created more than two decades ago,’ said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, in a statement. ‘This legislation gives them the authority to use HUD's experience to make changes that will better meet the needs of borrowers.’
The changes HUD is considering include the following:
- Financial assessments of HECM applicants to determine if they have the capability of meeting the responsibilities of the loan – including tax and insurance payment obligations;
- Mandating the set-aside of funds for tax and insurance payments to ensure borrowers can meet those obligations;
- Restrictions on the amount of proceeds that can be drawn initially in order to prolong the useful life of the assets; and
- Including all borrower spouses on loans – regardless of the spouse's age – as protection for either spouse against losing the home upon passing of the other.
"All of these changes consider both the best interests of borrowers and the ongoing health of the government insurance fund," Bell said. "Historically, HUD has made smart changes to improve the HECM program, strengthen the insurance fund and fulfill its mission of helping aging Americans maintain and remain in their homes. The importance of reverse mortgages as a financial tool for American seniors brought together leaders in both parties, both chambers of Congress and the administration.’