Should There Be A 15-Year Pay-Off For FHA Reverse Mortgages?

by Peter G. Miller
May 3rd, 2011

It used to be that FHA mortgages were as clear and understandable as possible, but then back in 2008 the Bush Administration began to fiddle with the FHA reverse mortgage product and now a new controversy has emerged.

The traditional understanding of an FHA-insured reverse mortgage was that it was a huge, negatively-amortizing mortgage. The owner–who had to be at least age 62–got financing on the basis of the property’s value and not income or credit. The FHA insured such mortgages because the loan amount was always far less than the appraised value of the property.

But what if the owner died, moved or sold the property? The rule was that the FHA reverse mortgage was to be repaid from the sale or refinancing of the property–that there would be NO claim against the estate or the heirs.

In 2008 HUD tried to re-write the rulebook with Mortgagee Letter 8-38. “The HECM is a “non-recourse loan,” said HUD. “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”

“Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.”

Well, no, there was nothing mistakenly inferred. If heirs or a surviving spouse refinanced the house for the full amount of the property’s current value–and the value was now less than the loan amount–that was all that could be owed. Any shortfall would have to made up by the insurance provider, meaning HUD.

AARP sued HUD in an effort to return to the old interpretation. And, HUD agreed rather than take the matter to court.

Now there’s a new twist, one that could again change the game.

90 Days No More

Usually there’s a 90-day period to settle a reverse mortgage after the borrower dies, sells or moves, but under a proposed Texas bill, HB 2410, heirs would have the right to repay the debt over 15 years.

If this legislation were to pass–and if the concept spreads to other states–the reverse mortgage program would end. The reason is that reverse mortgage lenders are not interested in making longer term loans. Statistically, about half of all reverse mortgages end within six years. That means lenders can count on getting much of their investment back within a particular amount of time and then re-invest elsewhere if they like. It also means that HUD has a very good idea of how much might be owed in the event of a claim.

You understand what the authors of the Texas bill are trying to do, but it’s an idea which should be added to the FHA loan program, should apply only to new loans and should not imposed by the states. In this way there would be better balance betwee the interests of borrowers and the interests of lenders.

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