By Mandelman
It was last April, right after the release of President Obama’s 2014 budget, when Assistant Housing Secretary Carol Galante was quoted as saying…
“The President’s budget projects that FHA may need a $943 million credit from the U.S. Treasury in October to make certain sufficient reserves are on hand today to cover projected losses over the next 30-years. This is not a certainty and FHA is taking every appropriate action to reduce the likelihood that such assistance is needed.”
So, what’s going on here? Why is the Federal Housing Administration (“FHA”) projected to lose so much money on its insuring of reverse mortgages?
The overall answer is simple… it’s just another outcome of the severe decline in U.S. home values, which began during the summer of 2006. You see, one of the key benefits of HUD’s Home Equity Conversion Mortgage (“HECM”), is that they are “non-recourse” loans.
That means that at the end of the reverse mortgage, which occurs either upon the death of the last surviving spouse or the sale of the home, if the balance owed exceeds the home’s value… then the borrower (or borrower’s heirs) can just walk away and owe nothing… with the balance paid by FHA, who is the insurer of these loans.
To cover this risk of loss at the end of a reverse mortgage, FHA receives an initial premium and an annual mortgage insurance premium, which borrowers pay at the rate of 1.25 percent of the outstanding loan balance.
Obviously, during the decades of steady home appreciation, or at least more stable home values, at the end of a reverse mortgage there was often still equity in the home and therefore some owners refinanced and others sold the properties, but few walked away. However, since home values have fallen, more and more people at the end of a reverse mortgage have found that the home’s value was now less than the amount owed on the loan… and since they couldn’t refinance… they took advantage of their option to simply walk away, owing nothing.
It’s also important to take note of the word, “projected” in Galante’s statement above. The losses mentioned are not today’s losses, rather they are losses that are projected to be realized in the 20-30 years ahead as a result of homeowners walking away at the end of reverse mortgages.
This is the first time in the history of the FHA …read more
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