Currently, the Mortgage Insurance Fund that backs reverse mortgages has a net value of $3.8 billion, with HECM accounting for 95% of all reverse mortgages.
However, like Cinderella, the guarantees and benefits of reverse mortgages would only be a dream without the Federal Housing Administration.
Here is an overview of HECM, the role of FHA in facilitating the program, and how its role will likely change in the future.
The Home Equity Conversion Mortgage (HECM) dates back to the term of former President Ronald Reagan. Having started a pilot program, the HECM became official after signing the Housing and Community Development Act on February 5, 1988.
However, it was not until 1989 that the first beneficiary, Marjorie Mason qualified for the loan. Currently, the FHA-insured reverse mortgage is available for any senior aged above 62 who meets preset qualifications. Seniors can pay daily expenses that many would have difficulty affording.
Who Funds Reverse Mortgages?
Contrary to what people think, the government does not fund reverse mortgages. Instead, the program is a product of the private-public partnership between the US government and other affiliates.
The Role of FHA
In the US, a reverse mortgage is a non-recourse loan, thus as a borrower, you are not responsible for paying more than your home equity. For example, if you sell your home at $100,000 and have an outstanding balance of $125,000, you won’t pay the extra $25,000. You have the backing of someone behind the scenes, and that’s the FHA.
Moreover, the loan is due if you die, move to a new residence, or decide to sell the house, courtesy of FHA.
The Federal Housing Administration plays the following key roles:
1. Facilitates Mortgage Accessibility
You may be willing to take a reverse mortgage and able to pay monthly mortgage charges yet have little equity. Similarly, weaker credit history may hinder you from accessing affordable mortgage rates.
The Federal Housing Administration offers mortgage insurance through FHA-approved financiers. Under the Home Equity Conversion Mortgage, the FHA protects your investments against liability in case of default. Thus, lenders will be willing to give you a mortgage, knowing that you have back up from FHA.
2. Lowers Down payment
Unlike conventional mortgages, FHA-insured mortgages have low down payments and reduced tax deductions. If you have a smaller or moderate income, saving for a down payment may be challenging.
FHA offers a reduced and affordable down payment. In addition to less stringent borrowing requirements, getting an FHA-insured loan becomes easy.
Does FHA Incur Losses?
According to Congressional Research Service, FHA-insured mortgages had massive default rates due to the 2008 economic crash. Mortgage defaults threatened the stability of the FHA-insured loans, especially for single-family households.
Moreover, FHA incurs huge losses on assigned loans whose servicing is the responsibility of FHA’s service providers. Assigned loans account for 42% of FHA’s loan-related losses. Such losses occur from variations in estimated and actual sales prices, costs of selling property, and maintaining the property before sales.
Additionally, when borrowers do not pay insurance and property taxes, the home lacks proper maintenance, lowering its value. Eventually, FHA will incur losses in property value when the homeowner decides to sell it.
The Future Role of FHA in Reverse Mortgages
Despite the modification of the HECM program after 2008, there is still growing concern about the risks and costs of the program. Therefore, the US Congressional Office and other policymakers proposed changing FHA’s roles.
Below are some proposals that may define FHA’s role in the future:
1. Direct Loan Program
The FHA may change the HECM into a direct program. Under direct lending, the US government will be the sole financier instead of FHA guaranteeing loans from private lenders.
2. Reduced Outstanding Balance
Reducing the outstanding loan balance that qualifies for FHA insurance would come in handy. Thus, lenders will have to assign active home equity mortgages to FHA earlier than before.
3. Shared Risks
Under shared risk, FHA will require mortgage financiers to hold active mortgages for a long time before assigning them. Thus, lenders will share in the risks and costs of selling loans.
4. Slowed Growth
Policymakers recommend slowing the growth rate of funds available for borrowers. Essentially, if you borrow a reverse mortgage and do not withdraw the whole amount up front, the remaining amount grows slower. Thus, FHA will spend less on reduced taxes levied on mortgages.
FHA: The Fairy Godmother
The Federal Housing Administration is the fairy godmother that insures reverse mortgages. It facilitates mortgage accessibility by making lenders willing to offer insured loans. Besides, FHA helps lower down payments for seniors who may not have adequate deposits for mortgages.
Despite economic downturns and financial losses, the future is bright for the mortgage industry. FHA has robust mechanisms that may keep the program functioning in the future.