Reverse Mortgage Taxpayer Subsidy

The Department of Housing and Urban Development asked Congress for nearly $800 million for its reverse mortgage insurance program while requesting its budget for 2010. This is the first subsidy that HUD has requested from the FHA since the start of the HECM program in 1990.

If the new funding is approved, it could affect the fees charged on their reverse mortgage program. HUD collects funds from insurance premiums charged to borrowers so reverse mortgage homeowners are charged the 2 percent of the home’s value as an up front payment, plus one half percent on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower’s principal balance.

The request has been viewed by department officials as a cautionary move in light of deteriorating housing prices and potential increased claims of insurance funds. HUD’s move comes as no surprise and was anticipated by some reverse mortgage lenders.

Designed for seniors over the age of 62, a reverse mortgage is a loan that allows the homeowner to convert equity in their principal residence into cash or monthly income, while retaining ownership. Home Equity Conversion Mortgages (HECMs) have become a popular form of reverse mortgage since their introduction in 1987. Before reverse mortgages became available, retired homeowners who needed cash had few options. They could sell and perhaps buy something smaller, move in with family members or move into a rental property. The other option would be to borrow against the equity in their home, but they would then face monthly loan repayments. The size of reverse mortgage loans is determined by the borrower’s age, the interest rate, and the home’s value. Usually the older a borrower, a greater percentage of the home’s value can be borrowed. A homeowner must have paid off their mortgage or have a small enough mortgage balance to be eligible. There are no limits on the value of homes qualifying for a HUD reverse mortgage, however, the amount that may be borrowed is capped by the maximum FHA mortgage lending limit. Homeowners may receive payments in variety of ways, including a lump sum, on a monthly basis or on an occasional basis as a line of credit. There is also the possibility of restructuring payment options if homeowners find that their circumstances have changed somewhere down the line.

The Federal Housing Administration (FHA), which is part of HUD, collects an insurance premium from all borrowers to provide this coverage. A HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Mortgage companies recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the company the amount of the shortfall.

The mortgage insurance premium (MIP) guarantees that if the loan servicer, or company managing the homeowner’s account, goes out of business, the government will step in and make sure they have continued access to the loan funds. Under the HECM program, borrowers are charged a MIP equal to 2 percent of the maximum claim amount or home value (whichever is less) plus an annual premium thereafter, equal to 0.5 percent of the loan balance. The MIP also guarantees that they will never owe more than the value of their home when the HECM must be repaid. FHA’s reverse mortgage insurance makes HUD’s program less expensive to borrowers than the smaller reverse mortgage programs run by private companies without FHA insurance.

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