Actor and pitchman Tom Selleck assures seniors that reverse mortgages are not “too good to be true,” but government officials said Wednesday they represent a “substantial economic drain” on federal programs backing them — with a negative net worth growing to $14.5 billion from $7.7 billion a year earlier.
Claims related to reverse mortgages backed by the federal government rose to $5 billion in the year ended Sept. 30, up about 20 percent from $4.2 billion in one year, the U.S. Department of Housing and Urban Development said.
HUD officials said the results justify moves effective in October to increase up-front insurance premiums and lower the borrowing limit for home equity that seniors 62 and older can tap in reverse mortgages. Such changes have been predicted to make reverse mortgages seem less financially attractive, though supporters of the loans say they remain a beneficial option that has already served more than 1 million seniors.
“Our duty is clear—we must make certain FHA remains financially viable so future generations can build wealth and climb the economic ladder of success,” Ben Carson, the HUD Secretary from West Palm Beach, said in a statement Wednesday.
Reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs) when backed by the government, raise concerns for taxpayers as well as holders of traditional or “forward” mortgages, according to the Federal Housing Administration. Unless trends change, Congress could have to step in with taxpayer money to stabilize the program, a step rarely needed, officials said. The single family insurance program has been generally self-sustaining since 1934 with the exception of a $1.7 billion infusion in 2013, which was largely because of reverse mortgages, officials said.
“Today, younger, lower-income homeowners with traditional FHA-insured ‘forward mortgages’ are routinely bailing out the HECM program through the mortgage insurance premiums they pay, placing a significant burden on the overall health of FHA’s Mutual Mortgage Insurance Fund,” according to a “fact sheet” from HUD. “We can no longer tolerate putting American taxpayers and future generations of seniors at risk. Quite simply, the HECM Program is losing money and can no longer remain viable in its present form.”
National Reverse Mortgage Lenders Association president Peter Bell said his group “shares Secretary Carson’s optimism that recent policy changes will help sustain the HECM program, which more than a million senior households have used to supplement retirement savings and age in place.”
Bell added, “We are still studying FHA’s Actuarial Report to Congress to understand how the actuaries have modeled the projected valuation of the HECM portfolio. In the past, we’ve raised concerns that actuaries misunderstood the behavior of a HECM loan over time – including how a loan is typically serviced and the home’s value at time of disposition.”
Bell said his group wants to study whether the HECM program should remain in the same fund with other kinds of mortgages, or be separated into its own insurance fund and evaluated on its own.
“This is a conversation we will be having with policy makers at the agency and on Capitol Hill, and with industry stakeholders,” he said.
Bell, whose own father lives in Palm Beach Gardens, has told The Palm Beach Post concerning recent government changes, “We think what they did is overkill.”
Reverse mortgages, familiar to most people through TV ads with celebrities like Selleck, were created in the late 1980s as a way to let seniors tap equity in their homes without moving out of them — to “age in place.” Instead of making mortgage payments each month, seniors who have paid off or substantially paid down their homes can get monthly or lump-sum payments without having to pay off the loan until they move out or die. A key selling point: The loans are backed by the government.
By law, seniors with reverse mortgages can never owe more than the home is worth, and borrowers pay premiums for federal insurance to pay off loans if they exceed the home’s value. This insurance also protects borrowers if lenders go out of business before paying out promised amounts.
But consumer agencies and members of Congress have raised caution flags on several issues.
“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” Consumer Financial Protection Bureau director Richard Cordray said in August. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”
Besides concerns that lender fees can be substantial on a product not all seniors understand well, others issues have surfaced. One surrounds rules about whether surviving spouses not on the mortgage can lose the house when the homeowner dies, a subject of correspondence in recent months between Carson and lawmakers including Florida Republican Sen. Marco Rubio.
Another potential pitfall involves seniors who fall behind on paying taxes and insurance and risk going into default or being forced out of their homes.
More than 18 percent of reverse mortgage loans taken out from 2009 to June 2016 were expected to go into default because of unpaid taxes and insurance, a HUD report last year found.
Nearly 90,000 reverse mortgage loans were at least 12 months behind in payment of taxes and insurance, the agency calculated.
Federal officials have been revising rules for reverse mortgages in an effort to cut down on such problems, but HUD officials said Wednesday the program must continue to be “closely monitored and managed.”
Reverse mortgage trends
Year U.S. Florida Palm Beach County
2017* 55,332 4,808 307
2016 48,902 4,273 411
2015 58,043 4,860 475
2014 51,642 3,834 382
2013 60,091 3,961 371
*Number of loans or “endorsements” for fiscal years ended Sept. 30 except in Palm Beach County, where calendar-year 2017 results reflect January through August.