by Nancy Osborne, COO of ERATE®
Oct 17, 2009 - A significant change is coming for the reverse mortgage program and it is almost certain to reduce the amount of loan proceeds available to borrowers. The Federal Housing Administration (FHA), which insures nearly 100% of all reverse mortgages, has continued to absorb many mortgage market responsibilities in the wake of the Fannie Mae and Freddie Mac takeovers in conjunction with the shrinking lending activity within the private sector. The FHA has become the government's MVP serving as the backstop of last resort in support of the housing market. As a result of its rapid growth the FHA is now under the microscope and its financial health is closely watched. With many retirees (and near retirees) stock portfolios having taken a serious hit, seniors have been turning to the reverse mortgage in record numbers. The increased popularity of the program has led officials at the FHA to conclude that it must make changes in order to assure the long term viability and continuation of the reverse mortgage program.
The function of the FHA in the reverse mortgage market is to insure mortgages made by approved lenders. As a result of falling home prices, the FHA is facing an increased insurance risk from these loans as the outstanding balances on the reverse mortgages insured reach the maximum claim amount relative to the declining value of the property. When this occurs, the originating lender could then, under the insurance provision, assign the loan to the FHA who would be obligated to pay the amount of the remaining loan balance to the lender. According to estimates, the reverse mortgage program could require nearly $800 million to bridge the gap. The program at its inception was intended to operate independent of subsidies and was to be reliant upon stable home equity levels spread amongst various loan-to-values throughout the country. The gap that has formed could be closed several ways, one by increasing insurance premiums or by reducing principal amounts. It was ultimately the later which seemed to be the method preferred by regulators.Refinance at Today's Low Rates!
A 10% reduction to the principal limit reduces the amount of available proceeds on a reverse mortgage. According to a national lender's association, this 10% reduction could translate into over 20% of would be reverse mortgage households being forced from their homes. Reverse mortgage borrowers had been able to payoff their current mortgage debt, thereby ending the need to continue making mortgage payments and convert their home equity into a lump sum payment or a stream of payments from the lender to the borrower or homeowner. As an alternative to the 10% loan reduction, another proposal that was offered was to reduce the amount of principal paid to the lenders under the insurance obligation. Instead, the remaining balance could be converted into a lien against the property in the way of a second mortgage and repaid to the lender over time or in a lump sum at the time the reverse mortgage is ultimately paid off. Perhaps this option could be given more serious consideration going forward.
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Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
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