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Why FHA Reverse Mortgages Have Become Toxic

by Peter G. Miller
July 29th, 2009

According to the National Reverse Mortgage Lenders Association there have been some 544,876 FHA-insured reverse mortgage loans since the program began in fiscal 1990. The last fiscal year was the best on record for the program with 112,154 reverse mortgages being insured by what HUD calls Home Equity Conversion Mortgages (HECMs).

The HECM program has generally done well, but those days are over. The program is in trouble and it’s possible that reverse mortgage insurance could become more difficult to get. Why? Because HUD is asking Congress for $800 million to support the program this year — money that’s not assured.

With a usual or forward loan, the borrower makes regular monthly payments and eventually pays off the loan, usually by selling to cover the unpaid debt.

With a reverse mortgage, a borrower had equity in the house. The borrower gets money from a reverse mortgage and does not have to make any monthly payments. When the owner moves, dies or sells the loan and all interest must be repaid from the proceeds of the sale.

So far, so good — if home values rise. However, home values nationwide reach their peak in April 2007, according to the Federal Housing Finance Agency.

Let’s see, April 2007 was a little more than two years ago. The typical FHA reverse mortgage is outstanding six years according to HUD. Twenty-three percent are done in three years.

You can see the problem. If home prices are going down but loan values are going up — remember the borrower is not making any monthly payments with reverse financing — then HUD must pay off any part of the loan not covered by the sale of the property. Translation: In down markets a reverse mortgage insurer can be hit with huge claims — little wonder that HUD has 90 percent of the business, and maybe more today.

The reverse mortgage is an interesting product for those above age 62 with equity and a need for monthly income. For instance, you might be able to pay off an existing FHA mortgage with a reverse loan. All of a sudden you would go from monthly payments to no monthly payments, not a bad option if you need more cash or perhaps have lost a job.

The bad news is that when you sell, move or die the equity in the property will be used to pay off the debt, meaning less of an inheritance for the children. That’s an issue in some families, and if that’s the case then perhaps tell the children you won’t get a reverse mortgage if they’ll chip in every month to support you.

If a reverse mortgage seems interesting, then please speak with an attorney who specializes in elder law before signing any paperwork with anyone. Given rising HECM costs, you might want to look into a reverse mortgage sooner rather than later because HUD has every reason to slow the program and face fewer claims.

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