New Reverse Mortgage Rules Will ‘Stop the Bleeding’

Speaking at a hearing before the House of Representatives on Thursday, Department of Housing and Urban Development Secretary Ben Carson directly addressed recent changes to the reverse mortgage program.

“When the reverse mortgage program was initiated, I think it was done with very good intentions, but without really looking down the pike, and people were taking out much larger amounts of their equity in the beginning than was sustainable,” Carson said, “and this was leading to a lot more problems than it was helping.”

Carson was responding to a question from Rep. Brad Sherman of California, a Democrat who represents Los Angeles County, about the effects of adjustments to mortgage insurance premiums and principal limit factors.

“How will the recent reverse mortgage changes impact the Mutual Mortgage Insurance Fund, the FHA insurance fund, and do you expect additional changes to the reverse mortgage program?” Sherman asked.

Carson didn’t comment on any potential future changes, but echoed HUD and FHA’s rationale for the new Home Equity Conversion Mortgage guidance.

“It’s also resulted in a much higher default rate, and that’s been a big drain on the MMIF, so the changes that we’ve made will sort of stop the bleeding in terms of [new reverse mortgages],” Carson said.

“The forward mortgage program is doing extremely well, so we’re doing some draining from the reverse mortgage [program],” the secretary continued.

When introducing the updated regulations in Mortgagee Letter 2017-12, the FHA painted the move as necessary to avoid a bailout from Congress, citing the reported $7.7 billion drag that the HECM caused on the MMI fund in 2016. But in a later follow-up call, HUD officials admitted that moves would not erase losses incurred by previous loans, and only help put new loans on a more solvent track.

Sherman’s line of questioning was one of multiple HECM-related inquiries thrown at Carson during the hearing before the House Financial Services Committee.

Rep. Denny Heck, Democrat of Washington, said he’s considering asking the Government Accountability Office (GAO) to either remove the HECM program from the MMI fund or change the forecasting assumptions to smooth out the significant changes in value from year to year.

“It’s always been hard to get a good sense of how the reverse mortgage program is doing, because the actuarial numbers swing so wildly from year to year,” Heck said. “In addition, although the program is small compared to the FHA forward mortgage program, the swings in reverse mortgages are so large that they’re pushing around the capital ratio.”

The secretary was amenable to Heck’s proposed changes.

“I think that’s a very worthy thing to pursue,” Carson said. “We’re looking at, just over the last year, $7.7 billion out of the MMI because of HECM. The changes that we’ve made as of this month, and all the [loans] that will be going forward from this point, I don’t think we’ll have that problem.”

“But we’ll still have that residual problem. So yes, I believe that would be a worthy pursuit,” Carson continued.

A little later on, the secretary also expressed approval for New York Rep. Carolyn Maloney’s request to allow co-op owners to participate in the reverse mortgage program.

“This is the type of housing I represent, and right now co-op owners are unfairly excluded from FHA’s reverse mortgage program — I would say for no real reason,” said Maloney, whose constituents include the urban denizens of Manhattan and Brooklyn.

“I certainly don’t see any reason why we shouldn’t engage in that conversation with you, and let’s look at the numbers, and let’s see what works, because I’m doing things that make sense,” Carson replied.

Carson also reinforced his desire to focus HUD’s efforts on first-time and low-income homebuyers, which he had characterized as the primary role of the department in announcing the new reverse mortgage rules.

“Housing finance reform should be built on shared goals of ensuring a well-functioning housing finance system that provides access for credit-worthy borrowers that are ready to own a home, expands the role of the private sector, and reduces overall taxpayer exposure,” Carson said in his opening remarks.

Written by Alex Spanko

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