Last month members of Congress reviewed the U.S. Department of Housing and Urban Development’s Home Equity Conversion Program (HECM) in an effort to determine how and when the program could be shored up. In December 2012 Federal Housing Administration (FHA) Director Carole Galante, responding to an actuarial report, testified before Congress that the HECM — also known as the Reverse Mortgage program — had a one billion dollar deficit due to foreclosures. Galante promised that changes would be forthcoming but some members of Congress are concerned that needed changes aren’t being implemented quickly enough.
In recent remarks Galante has questioned whether the FHA has the needed authority to implement the necessary changes that would shore up its insurance fund. Members of Congressional oversight committees seem to think that a mortgagee letter from the FHA will serve to begin the process of strengthening the Reverse Mortgage product and may forestall a possible move by the FHA to draw on a 2014 taxpayer bailout for the Reverse Mortgage program.
Congressman Randy Neugebauer (R-Texas), who chairs the Subcommittee on Housing and Insurance summarized the subcommittee’s feeling. “One of the troubling things is [borrowers] aren’t required to meet any income or credit qualifications. These lax standards have resulted in higher default rates, leaving seniors in financial hardship.”
In April 2013 HUD made the first change in its program following the 2012 actuary report. HUD eliminated the one-time draw option that had, until then, allowed HECM borrowers to access their loan funds in one lump payment. The HUD determined that accessing the loan funds in this way often left borrowers without sufficient funds to enable them to pay for their loan obligations. When borrowers couldn’t meet their responsibilities the lending institutions were forced to foreclose on the home, creating the HECM fund deficit.
Three additional changes that the FHA would like to implement include limiting the amount of the allowable draw as appropriate, running background checks on borrowers to determine their ability to maintain the loan’s expenses — home maintenance, interest payments, property tax payments — and creating a borrower-escrow account into which a portion of the loan’s proceeds would be placed to cover future loan expenses.
HUD Secretary Shaun Donovan has assured Congress that the HUD intends to implement these changes as soon as it receives the authority to do so. Such changes, Donavan has stated, would protect borrowers and shore up the insurance fund. He hesitates to implement the changes through a Mortgagee Letter, however, because he feels that they would not be as effective as changes mandated by legislation.
Congressman Mike Fitzpatrick (R-Penn) and Congressman Danny Heck (D-Washington) of the Subcommittee on Housing and Insurance have drafted the legislation that the HUD is requesting.