On June 12th 2013, the U.S. House of Representatives passed the Reverse Mortgage Stabilization Act, H.R. 2167. This act, gives the Housing and Urban Development Secretary, HUD, authority to make whatever changes it deems necessary to the Reverse Mortgage Program known as Home Equity Conversion Mortgage, HECM. According to an FHA’s audit performed in 2012, the program’s losses could cause FHA to require a bailout. HUD indicates that upon completion of HECM counseling, a borrower should be able to make an independent, informed decision of whether this product will meet their specific needs.1 However, more than the counseling session, I think the escrow account to ensure timely payment of insurance premiums and property taxes will be material to reducing the number of defaults.
The HECM program works very much like an ordinary reverse mortgage; if a homeowner has a substantial equity in his/her home, primary residence, he/she may withdraw from this equity through a lump sum, monthly payments, a line of credit, or a combination of both.2 To qualify, a borrower must be 62 years or older, own the property or have paid out a large share of the mortgage, occupy the residence as the primary home, not be delinquent on any federal debt, and attend a counseling and information session offered by HUD-approved HECM counselor. As expected, the property must meet all of the FHA property standards. Once approved, the borrower has the obligation to pay for taxes and insurance premiums. The insurance premiums pay for FHA mortgage insurance, which guarantees the stream of income.
The problem with the program is that many participants have defaulted in their tax and insurance premium payments.
An actuarial report performed in late 2012 showed a “2.8 billion in negative net worth for the Mutual Mortgage Insurance Fund,” and the proposed budget for 2014 by the President Obama’s administration forecasts losses that would lead the FHA to default.3
Officials from HUD are strong supporters of the program, but they recognize the need to tightened standards and educate borrowers as a way to sustain the program. During a congress review, Charles Coulter, deputy assistant secretary at HUD, said “I believe we can put this program on a positive track and ensure it is providing service in the market” Coulter indicated the following changes were necessary to put the program in the right track:
- limiting the amount of the allowable draw
- use of escrow accounts or a set aside to ensure continued and timely payments of insurance premiums and property taxes
- financial assessment as part of the loan origination process to ensure the borrowers can meet HECM responsibilities
And so the passing of the Reverse Mortgage Stabilization Act, H.R. 2167, has given HUD the authority to implement the changes outlined by Coulter. HUD’s website already indicates that applicants must meet with a counselor before they are approved: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmabou
Given your experience with reverse mortgage, first hand or having observed, do you support the new requirements?
Do you think that educating potential borrowers about their responsibilities will make a difference in their behavior?
Does your mortgage branch process many reverse mortgages?
Why do you think seniors were defaulting in their insurance premiums and property taxes?
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