HUD Finds Reverse Mortgage Program in the Red

Recent headlines have pointed to the finding of an annual report based on the financial position of the Federal Housing Administration—the insurer of nearly all reverse mortgage loans in the U.S. The finding: FHA and its reverse mortgage program are in the red by billions of dollars.

What does this mean for reverse mortgages?

While housing officials have pointed to potential changes to the reverse mortgage program, no changes have taken place yet. The potential changes may include a reduction in the amount of funds a borrower can receive as a percentage of his or her home equity through a reverse mortgage. Housing officials have also said the Department of Housing and Urban Development may look into limiting the uses of lump-sum reverse mortgages to paying off certain types of qualifying debt.

What does this mean for the FHA?

The FHA’s annual audit showed the “capital position” of the administration is negative by more than $13 billion. The Home Equity Conversion Mortgage reverse mortgage program took another $2.8 billion from the agency’s economic value. What it means is that FHA is short by that amount, should the administration have to pay all of its outstanding insurance claims at once.

The implications are far reaching—depending on whom you ask. On the one hand, the FHA is mandated by law to hold a reserve fund with at least 2% of all insurance claims outstanding. This is to protect the insurance fund from falling into negative territory as it has this year.

As a result, the FHA could call on the Treasury for the first time in history to cover the potential losses the fund is facing. This action can be taken without the approval of Congress, but won’t be decided until budget talks take place in early 2013.

Could be worse?

Another school of thought, however, on the FHA’s capital position is the fact that the hole could have gone even deeper.

FHA has greatly increased its presence in the mortgage market following the departure of private capital from the market as a result of the housing crisis. The agency has offered several special programs such as the Home Affordable Modification Program to aid borrowers in refinancing their mortgages so they can stay in their homes or purchase new ones.

Had it not been for FHA’s role throughout the housing crisis, there could be many more Americans facing foreclosure.

What do I get from FHA’s insurance?

FHA’s insurance provides several important protections to reverse mortgage borrowers. First, the FHA guarantees the borrower will receive all payments as agreed upon by the lender and borrower at the time of the loan closing.

Second, the insurance guarantees that the borrower will never owe more to repay the loan than the home is worth at the time of sale. This is a critical benefit to many people in the current housing market whose homes may have gone down in value over time.

As a borrower, once the loan becomes due for you or your heirs, you can rest assured that the sale of your home will cover the loan and interest repayment if you opt to repay the loan by selling your house.

If you already have an FHA-insured reverse mortgage, you should see no change in your loan whatsoever as a result of the housing department audit.

Resources / Credits:

ALLRMC.COM
HUD.GOV