HUD’s Taxpayer Disregard – Trump Administration Plans New Restrictions on Reverse Mortgages
The Trump administration is planning to raise premiums and place tighter loan limits on some borrowers in a mortgage program that helps seniors supplement their incomes.
The U.S. Department of Housing and Urban Development on Tuesday announced the changes in a letter to lenders to the so-called reverse-mortgage program, which allows seniors to take out a loan against the value of their home. The Trump administration feels the changes are necessary to put the program, which is backstopped by taxpayers, on a sounder financial footing.
“Given the losses we’re seeing in the [reverse mortgage] program, we have a responsibility to make changes that balance our mission with our responsibility to protect taxpayers,” HUD Secretary Ben Carson saidthrough a spokesman.
The modifications won’t apply to borrowers with existing mortgages, but will affect those who take out new loans. Some 650,000 borrowers have outstanding reverse loans insured by the Federal Housing Administration, which is part of HUD.
Most new borrowers will pay bigger premiums upfront but lower ones over the life of the loan, lessening the risk to taxpayers if seniors live longer than predicted. Borrowers will now pay 2% of the amount of the home’s value upfront and 0.5% annually over the course of the loan.
Currently, most borrowers pay 0.5% upfront and 1.25% annually over the remainder of the loan. Some who borrow more than 60% of the amount they can borrow against the home in the first year already pay 2.5% upfront so they will see premiums go down slightly.On balance, most seniors will also be able to borrow less money. The average borrower at current interest rates will be able to borrow roughly 58% of the value of their home, down from 64%. But those limits vary significantly based on interest rates and the age of the borrower. While most seniors at current interest rates will be able to borrow less, some may be able to borrow more if rates rise.
The FHA’s reverse-mortgage program allows seniors to take out loans from private lenders against their homes to supplement pension income and help those on fixed incomes deal with unexpected or rising expenses. When the borrower moves or dies, the proceeds from the home’s sale are used to repay the loan.
But the program also carries significant risks for the federal government, which backs the loans.
The FHA covers the losses on the loans from a reserve fund that is supported primarily by premiums paid by younger borrowers on traditional FHA mortgages. Since 2009, the reverse-mortgage program has drained nearly $12 billion from that fund.
“You have this cross-subsidy from younger, less-affluent people who are trying to achieve homeownership,” said Adolfo Marzol, a senior adviser at HUD.
In 2013, FHA required a one-time $1.7 billion Treasury appropriation, largely because of losses from the reverse-mortgage program.
Lenders use actuarial tables to determine how much borrowers are eligible to receive. But making predictions for 15 to 20 years in the future is an inexact science and the loans can end up losing money if home-price growth is slower than expected, seniors don’t keep the homes in great repair, or they live longer and more interest accrues on the loan. Without changes, federal officials say that the program is placing an increasingly large burden on the reserve fundand within the next couple of years FHA would require an appropriation from Congress to keep backing reverse mortgages. It is also indirectly hurting HUD’s ability to lower premiums on forward mortgages by putting pressure on the reserve fund, officials said.
On Inauguration Day, the Trump administration announced that it was suspending an Obama administration directive to reduce premiums on traditional FHA mortgages by a quarter of a percentage point.
Advocates for the reverse-mortgage program say it is a critical resource for some seniors, despite its financial challenges.
“Being able to survive retirement when you don’t necessarily have a large 401(k), that creates the real risk of just being able to pay the bills and eat food and stay in a home,” said David Stevens, president of the Mortgage Bankers Association and a former FHA commissioner.
The changes to the program met with a mixed reaction from advocates for seniors and mortgage industry leaders. Many said they recognized something was needed to improve the financial health of the program but that higher premiums and lower loan limits are likely to mean that fewer seniors will take advantage of it.
“On the one hand I’m glad to see there’s a commitment to keeping the program viable within the new administration. On the other hand these might be hard changes to really absorb,” said Peter Bell, president and chief executive of the National Reverse Mortgage Lenders Association.
Write to Laura Kusisto at firstname.lastname@example.org
Appeared in the August 30, 2017, print edition as ‘HUD to Tighten Rules on Reverse Mortgages.’