Reverse mortgage lenders are learning that the Federal Housing Administration (FHA) is moving quickly to implement a reduction in the loan proceeds that seniors can receive from a FHA-insured Home Equity Conversion Mortgage (HECM).
National Reverse Mortgage Lenders Association (NRMLA) president Peter Bell said FHA is expected to issue a mortgagee letter soon — possibly this week — on the HECM cut that could go into effect Oct. 1, the beginning of FHA's fiscal year. The reverse mortgage program faces an estimated $800 million shortfall due to declining house prices and it appears that congressional appropriators are not going to cover this credit subsidy shortfall.
As an alternative (suggested by Congress), FHA is moving to cut HECM loan proceeds by 10%, according to sources. An analysis by NRMLA of the loan production by three large HECM lenders shows 21% of seniors would not be able to pay off their existing mortgage if their loans proceeds were cut by 10%. For seniors that need a HECM to remain in their home, the reduction in loan proceeds means they might have to sell or face possible foreclosure.
"This is highly disruptive for the reverse mortgage industry, but more importantly to seniors' ability to access the equity in their homes to pay off their current mortgage," Bell said. FHA declined to comment.
Meanwhile, in other FHA news, the agency is playing a larger role in the origination market and could end the year with a 30% market share, according to FHA commissioner David Stevens.
FHA currently has a 23% market share, he said, and is no longer just a "countercyclical agency." FHA has become a "significant source of primary capital to fund the needs of homeownership," Stevens told a National Association of Federal Credit Unions conference.
Meanwhile, the origination of mortgages has become very concentrated among several large banks, he said. He encouraged credit union executives to become more involved in mortgage lending to serve their members. He noted that FHA is increasing its net worth requirements, tightening credit standards, and taking other steps to control risks, such as hiring FHA's first credit risk officer.
"FHA will never be able to fulfill its mission long-term or short-term if it is under scrutiny for not being well managed from a risk management standpoint," he said.
The CRO candidate has already been picked and should be on board by year-end, he added.