Reverse Mortgage Loan Blog

President Barack Obama’s budget includes an $800 million request to fund a government-backed reverse mortgage program through the Federal Housing Administration. That program hasn’t required taxpayer money in the past, but the Department of Housing and Urban Development says that declining home values will increase costs for the government.

At a minimum, the taxpayer subsidy means that costs won’t be rising on reverse mortgages, and that the government plans to make sure there’s still a liquid market for the loans.

Reverse mortgages allow homeowners aged 62 and up to borrow against their home’s value. The loan is paid back with interest when the homeowner sells the property or dies. These mortgages boomed as home prices hit new highs earlier this decade, but the market for those loans has largely disappeared now as home prices have fallen, leaving the FHA as one of the last sources for reverse mortgages. Such loans are “significantly more sensitive to house prices and what happens to those prices” than the FHA’s traditional business, says HUD Secretary Shaun Donovan.

The FHA insures loans against losses, but doesn’t make any loans. That means that if the agency guarantees a $250,000 reverse mortgage, known as a Home Equity Conversion Mortgage, and the home’s value has fallen to $225,000 when the borrower dies, the government covers the shortfall to the lender.

The FHA collects insurance premiums from borrowers to provide that coverage, but the agency opted not to increase those premiums this year, “given the current pressure on retirement savings” for seniors, said Mr. Donovan.

The stimulus bill that President Obama signed in February increases limits on reverse mortgages to $625,500 from $417,000.

The FHA isn’t asking for any taxpayer money for its larger conventional mortgage program, despite some concerns that its reserve fund might fall below a threshold that requires the fund to have more than 2% the value of its total mortgages. That fund fell to around 3% last year, from 6.4% a year earlier.

At a congressional hearing last month, Mr. Donovan said he was considering whether the FHA would need taxpayer money or a premium increase. On Thursday, he said he believed a home price recovery later this year meant that neither measure would be necessary.

“Fundamentally, FHA business is sound and will make money for the taxpayer in 2010,” he said, adding that he was “quite comfortable” that the FHA wouldn’t need to increase premiums to cover losses.

Found here.

Bookmark It