Wednesday, December 19, 2012

FHA Reverse Mortgage Losses Of $28 Billion – Profits For Banks, Disaster For Borrowers and Taxpayers

Reverse mortgages have become the new minefield in government sponsored mortgage lending. According to an independent estimate done for HUD, losses could exceed $28 billion through 2019.

 To put that figure into perspective, total losses to the FDIC Deposit Insurance Fund for the 51 banking failures of 2012 total only $2.5 billion.
The good news is that the FDIC does not insure reverse mortgage losses since the estimated losses on reverse mortgages would completely wipe out the FDIC’s deposit insurance reserve which totals only $25.2 billion at September 30, 2012. The bad news is that ultimately, one way or another, the taxpayers are now looking at another potentially massive bailout of another government sponsored mortgage program gone wrong.
The nonstop ads on cable television make it sound like reverse mortgages are the magical solution to every financial problem faced by the elderly. Reverse mortgages are, in fact, the most complex mortgage product out there. Most seniors probably don’t fully comprehend what they are getting into with a reverse mortgage unless they possess a high degree of financial sophistication.
Many elderly homeowners who took out reverse mortgages are now in foreclosure and risk losing their homes. According to a summary issued by HUD last year, reverse mortgage delinquencies have skyrocketed by over 200%. More than 5% of reverse mortgages are in technical default and possibly 20% of reverse mortgages may not be in full compliance with loan terms.
Some of the biggest and most respectable banks in the country have exited the reverse mortgage program due to the high default rate and bad publicity that results when banks have to foreclose on an elderly delinquent reverse mortgage borrower. The FDIC has also issued a warning to the elderly in their Consumer News report to be alert for abusive or criminal scams related to FHA reverse mortgages.
If reverse mortgages are potentially a financial disaster for elderly homeowners and if major banking institutions have stopped doing reverse mortgages since they consider them a potentially inappropriate financial product for the elderly, why are reverse mortgages being so heavily marketed by the lenders still doing reverse mortgages? You can’t watch cable TV for 10 minutes without seeing “good ole boy” Fred Thompson hawking reverse mortgages to seniors as the solution to all of life’s financial problems. Of course, none of the ads mention the potential financial dangers of a reverse mortgage. The reason reverse mortgages being so heavily marketed to seniors is because they are extremely profitable to the lenders. Buyers beware – we all know the old saying “if something sounds to good to be true, it usually isn’t.”
Some States that are concerned with protecting elderly consumers from abusive practices relating to the reverse mortgage program have stepped forward with new consumer protection legislation. Massachusetts has passed a law that will require face-to-face interviews with certain reverse mortgage applicants and a state approved housing counselor. The new law, however, will not take affect until August 1, 2014.
The new Massachusetts law requiring face-to-face interviews will only apply to reverse mortgage applicants who at the time of application:
  • Have a gross income less than 50% of the area median income
  • Possess assets of less than $200,000, excluding the value of the primary residence
Right or wrong, lawmakers seem to taken the position that higher net worth individuals are more financially sophisticated and do not need a face-to-face interview with a housing counselor.
The penalty for not complying with the new face-to-face interview law is severe. In addition to penalties, if a borrower executes a reverse mortgage without the mandated counseling, the terms of the reverse mortgage will be rendered unenforceable. The new law also protects elderly consumers by requiring a 7 day “cooling off period” after the issuance of a written commitment before the loan can be closed.
More on this topic from the Wall Street Journal:
Spare a thought for Shaun Donovan, who must be tired of crafting nuanced explanations of how his agency costs taxpayers billions of dollars. The latest example came this month when the Housing and Urban Development Secretary told the Senate that the Federal Housing Administration’s once-modest reverse-mortgage program is the latest drain on taxpayers thanks to gross mismanagement.
Or as Mr. Donovan delicately put it to Tennessee Senator Bob Corker, the FHA’s reverse-mortgage business is an “important” issue that the agency needs “to make changes on.” You don’t say.
HUD’s independent actuary estimated last month that the FHA will lose $2.8 billion this fiscal year on reverse mortgages, and in the worst case $28.3 billion, with the losses stretching through 2019. The feds have no idea how big the pool of red ink might be.
The problem is that taxpayers, via the FHA, insure lenders against the funds they advance plus accrued interest, and borrowers can also borrow to pay the fees. FHA did fewer than 50,000 reverse-mortgage deals a year until 2006, when the housing mania went galactic. By 2007, the agency was insuring more than 100,000 reverse mortgages, and by 2009 the average FHA-backed reverse mortgage reached $262,763, often paid in a lump sum.
At least FHA guarantees for home purchases foster Congress’s professed goal of homeownership—though we’ve seen in the housing bust how that misallocates capital. But guarantees for reverse mortgages go to people who are already homeowners who want to cash out of a real-estate asset.
The National Reverse Mortgage Lenders Association wants to limit the amount that borrowers can draw upfront and have lenders do more stringent underwriting and set aside money to cover taxes and insurance. Mr. Donovan told the Senate he wants to make the program “much more effective and safe.”
That’s nice, but where was this prudence when we needed it in 2006-2009? The government has no business subsidizing senior homeowners so they can blow through their life savings before they die. Mr. Donovan could really help taxpayers by suspending this program and working with Republicans to ban the FHA from the business.

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