Because of the largesse of federally financed subsidies in the Federal Housing Administration’s reverse-mortgage program, the federal government has gradually crowded out private insurers from the market for these financial products since the program began in the late 1980s.
Indeed, amid the multitrillion-dollar maze of federal insurance and guarantee programs lies the Federal Housing Administration Home Equity Conversion Mortgage program—an insurance program providing loss coverage on reverse-mortgage originations backed by federal taxpayers.
The loan program simply has become a severe financial burden for federal taxpayers. The Federal Housing Administration reports that the Home Equity Conversion Mortgage program faces a financial shortfall totaling roughly $14 billion in fiscal year 2017.
To avoid any further compounding of the fiscal fiasco, policy leaders should wind down the federal Home Equity Conversion Mortgage program, and in the interim certainly refrain from any misguided reforms that would increase moral hazard, put more taxpayer money at risk, and ultimately continue to crowd out private mortgage insurers from the market for reverse mortgages.
What the Program Does
The Federal Housing Administration administers the reverse-mortgage insurance program. The program became permanent to the agency’s parent, the Department of Housing and Urban Development, in 1998—and before that, the agency insured only traditional, “forward” single-family housing mortgages.
Unlike traditional, “forward” mortgages, reverse mortgages allow homeowners (borrowers) to receive proceeds of the loans while requiring repayment of the accumulated loan principal and interest only upon termination of the reverse mortgage.
The Home Equity Conversion Mortgage program allows eligible homeowners (generally 62 years of age and older) to convert a portion of their accrued home equity into a stream of cash payments, which they can then use to cover their living expenses.
Except in certain cases, reverse-mortgage borrowers do not owe the loan balance until the termination of the mortgage, usually because of the borrowers’ relocating their primary residence or death. At the time of those events, the home is sold, and the proceeds go to offset the payment of the loan balance.
Expansion of the Program
Over the past couple of decades, and after years of dramatic increases in home prices, the number of participating homeowners taking up reverse mortgages in the Federal Housing Administration’s Home Equity Conversion Mortgage program has grown.
To accommodate the run-up in home prices that began prior to the 2008-2009 recession, Congress enacted numerous statutory changes to the Federal Housing Administration’s Home Equity Conversion Mortgage program in the late 2000s, reforms that encouraged more homeowners to enter the program.
In 2008, for example, Congress authorized increases in the statutory loan limits for eligibility into the program that extended up to $625,500 in certain high-cost markets. For 2017, the Federal Housing Administration raised the upper loan limit to $636,150, which further expanded program eligibility to high-value homes across the U.S.
Consequently, there are now about 440,000 active reverse mortgages in the Federal Housing Administration’s Home Equity Conversion Mortgage program with the total insurance portfolio increasing almost $30 billion during the past five years to $73 billion.
Financial Losses in the Program
Over the past several years, primarily because of the significant fall in home prices during and after the 2008-2009 economic recession and greater cost burden of properly maintaining properties, the Home Equity Conversion Mortgage program has become a major financial burden on federal taxpayers.
Financial losses in the program can occur for numerous reasons, though the primary risks to the Federal Housing Administration in recent years have indeed been higher-than-expected costs to maintain properties, as well as home-price fluctuations.
The agency, for example, must properly account for homeowners’ borrowing against equity during boom periods, which can ultimately result in loan balances exceeding the value (sale price) of homes when mortgages terminate.
According to the Federal Housing Administration and an independent actuary, the program has a financial shortfall of about $14 billion for fiscal year 2017, weighing down the capital reserve ratio in the program to minus 19 percent.
To cover shortfalls in the program, the Federal Housing Administration must use offset reserves generated in the agency’s single-family housing mortgage insurance program, or when the capital reserve fund is depleted, as occurred several years ago, the agency must request special bailout funds from Congress.
In any event, while the Federal Housing Administration reports the capital reserves for both programs separately, the agency must maintain at least a minimum level of reserve funds (to cover the combined losses in both programs), which currently remains just above the statutorily required amount.
Moreover, based on the projected financial frailty of the Home Equity Conversion Mortgage program, the Federal Housing Administration has acknowledged that it would likely fail to maintain this required level of capital reserves if conditions in the economy and housing market were to deteriorate.
Yet, current reform efforts in Congress by Rep. Maxine Waters, D-Calif., would likely encourage higher levels of adverse selection among riskier borrowers, and further strain the weak financial condition of the program.
Time to Privatize the US Reverse-Mortgage Market
Given the enormous costs to federal taxpayers and risks to American homeowners, Congress would be wise to shut down the inefficient and unnecessary Home Equity Conversion Mortgage program administered by the Federal Housing Administration, and allow a robust private insurance market in reverse mortgages to emerge.
Until the program is wound down, federal policy leaders should begin to decrease the loan limits used for program eligibility, and avoid any misguided reforms that would create additional costs to taxpayers, or that would further crowd out a private, nongovernment-subsidized market in the U.S. for reverse mortgages.
