Coming Changes in Reverse Mortgages

Reverse mortgages help older homeowners stay in their homes by letting them spend home equity without selling the homes or writing monthly repayment checks. The number of reverse mortgages issued increases each year, and most of those mortgages are insured by the FHA. If the banks or other lenders misprice the mortgages and lose money, the FHA will cover the losses. That policy, combined with the collapse of housing prices, is causing problems for the program. The FHA will lose almost $3 billion on the program this year and doesn’t know how high the losses will become in coming years. That all depends on how home prices perform in coming years. Congress is looking into the problems and probably will revise the program, possibly either limiting access to guaranteed reverse mortgage or even eliminating the guarantees.Or it might decide the problems are a legacy of the housing boom and need to be worked out over the coming years.

The FHA’s analysts didn’t foresee an extended period of house price declines and didn’t price mortality risk properly. Many loans are now worth more than the house itself, and heirs decided to walk away. FHA has to foot the bill for selling the house and make good on the shortfall between the net proceeds and what lenders are owed on the insurance. Taxpayers are ultimately on the hook.

So now comes the usual Beltway talk about reform to try to save a program that shouldn’t exist. 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.”