Government in Debt Over Reverse Mortgages

Government Plans Big Reverse-Mortgage Curbs

By Philip Moeller

Reverse mortgages, long criticized for high fees and other anti-consumer features, turn out to actually be the opposite—such a good deal that the government is nearly $3 billion in the hole on outstanding mortgages. As a result, the Federal Housing Administration (FHA) will later this month unveil sharp curbs on its loan product, called the Home Equity Conversion Mortgage (HECM).

When the new rules are issued, consumers will need to take a close look at the terms of these loans. While the specifics of the changes have yet to be announced, they will lead to consumers being able to access a smaller share of their home's equity when they take out a reverse mortgage. In addition, lenders will probably be required to set aside a portion of the borrower's home equity to pay future property taxes and home-insurance premiums. And there may also be limits that restrict lower-wealth borrowers from taking out a HECM.

The FHA (and thus taxpayers) has been losing the most money on the most popular HECM loan: a fixed-rate loan known as the Standard HECM loan. This type of loan will be halted under the new rules. Most borrowers thus will be required to consider a newer reverse mortgage called the HECM Saver.

The HECM Standard loan often carries steep insurance fees and other charges. But it pays out a higher percentage of a homeowner's equity than the Saver, which charges nearly no insurance fees and is less costly to consumers. But it is also a more conservative loan to the FHA because it pays out a smaller percentage of an owner's equity than does the HECM Standard loan. This provides the government a bigger cushion against loan losses that could eventually lead to costly insurance claims by private lenders.

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