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FHA Reverse Mortgage Applicants May Be Affected By Payout Limits

A policy that went into effect Oct. 1 could prevent more than 1 out of 5 people 62 and older from paying off their existing mortgage debt with the proceeds of a new reverse loan, experts say.

Declining home values have put a serious squeeze on the Federal Housing Administration’s reverse mortgage program for seniors 62 and older.

In a Sept. 23 letter to reverse mortgage lenders, FHA Commissioner David H. Stevens said his agency must reduce the maximum amounts that seniors can receive from reverse mortgages because of an estimated $798-million budget shortfall for the program in the coming fiscal year.

Industry sources said the move amounted to a 10% cutback for all new FHA reverse mortgage applicants starting Oct. 1. Borrowers who already have FHA reverse mortgages will not be affected.

Peter Bell, president of the National Reverse Mortgage Lenders Assn., said the policy change could prevent more than 1 out of 5 applicants from being able to pay off their existing home mortgage with the proceeds of a new reverse loan. That, in turn, could leave some homeowners in danger of falling into serious delinquency on their loans or even ending up in foreclosure. The total number of seniors affected could be in the tens of thousands, Bell said, since about 130,000 new reverse loans are projected for fiscal 2010.

Dennis Ceizyk Sr., vice president of Heartland Mortgage Inc. in Tucson, Ariz., says the FHA’s move affects two of his company’s clients — a Phoenix couple in their late 70s who no longer can afford the monthly payments on their existing mortgage. They had planned to take out a reverse mortgage yielding them $92,500 in cash on a house valued at $125,000. The $92,500 lump sum would pay off their $75,000 mortgage balance, plus closing and other transaction costs, leaving them approximately $6,000.

“They’d be able to get out from under their mortgage payments and have a little money in their pockets” while still remaining in their house, Ceizyk said. But under the FHA’s new rule, the $92,500 in initial proceeds would be reduced by $9,250 to $83,250 — not enough to pay off their loan and handle the combined closing expenses.

Under a reverse mortgage — the official FHA name is Home Equity Conversion Mortgage — the lender typically provides senior homeowners with a lump-sum payment, monthly payments or an equity credit line. The amounts paid to the owners are secured by the equity in the house and become due and payable with interest when the owners sell the property or otherwise cease using it as their residence. Borrowers are guaranteed the right to remain in their houses indefinitely, even if their debt balance exceeds the property’s value.

The FHA insures reverse mortgages made by approved lenders. In the event the loan balance approaches what the FHA determines is the maximum claim amount against the property, the lender can assign the loan to the agency and be paid the balance owed. Earlier this year, Obama administration budget officials told the FHA that, based on their projections of home price movements during fiscal 2010, the reverse mortgage program would need a subsidy of $798 million by Oct. 1 to cover a widening gap between estimated balances extended to borrowers and the property values backing them.

The gap could be filled in one of several ways, budget officials said, including congressional appropriations, a reduction in principal amounts or an increase in insurance premiums charged to borrowers. Ultimately the agency chose to limit principal amounts.

Stevens said in a statement that “we are taking steps to make certain the program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option.”

Reverse mortgages increasingly have been used by seniors as a financial planning tool. Homeowners are often able to extinguish their mortgage debt — stop paying out hundreds or thousands of dollars a month — and convert their home equity into a cash resource or income stream. This is especially important for seniors who are on financial tightropes.

Though the new 10% cutback may make things tougher for them during the coming year, Bell and others are working on plans to reduce its effect. One idea, he said, is to allow seniors’ current lenders to agree to accept less than a full payoff, given the diminished reverse mortgage proceeds available. The unpaid balances could then be recast as junior liens secured by the property, repayable over an agreed-upon term of years, or in a lump sum with interest when the house is sold.