There are many good reasons for the federal government to intervene in the economy, but diverting resources from less affluent first-time home buyers to seniors who already own homes would not be at the top of our list.
Nevertheless, that is what the Federal Housing Administration’s Home Equity Conversion Mortgage program – commonly known as the “reverse mortgage” – essentially does. Kudos to the Trump administration for deciding last week to rein in this dubious use of the federal balance sheet.
Basically, a reverse mortgage lets homeowners 62 and older borrow from private lenders, secured by the equity in their homes. The cash helps meet needs not covered by Social Security, pensions and the like. Lenders get paid back from the proceeds of a sale when the homeowner moves or dies; if home prices go up, the returns can be sweet indeed.
In fact, lenders get paid no matter what, because FHA insures the loan in return for an upfront fee and monthly premiums. Meanwhile, the homeowner is also on the hook for maintenance, property taxes and insurance; in a nontrivial number of cases, these costs have driven seniors into foreclosure.
More than 18 percent of reverse-mortgage loans taken out from 2009 to June 2016 are expected to go into default for these reasons, according to a recent internal government report. For the unfortunate elderly people in this predicament, the reverse-mortgage program’s promise of a way to “age in place” rings hollow.
This is just one of the risks that have rendered FHA’s 650,000-loan reverse-mortgage portfolio more difficult to manage than anyone expected when the program began in 1990. Since 2009, reverse-mortgage losses have cost FHA’s reserve fund $12 billion.
This same reserve fund is supposed to backstop lending to low-income newcomers to the housing market, however – and it is in that sense that reverse mortgages constitute a perverse redistribution of resources.
The new rules for the program announced by Ben Carson, the secretary of housing and urban development, will require new would-be borrowers to provide much higher upfront payments while significantly lowering the total amount anyone can borrow. That should help ensure that reverse mortgages only go to homeowners who are actually capable, financially, of handling them.
It should also limit the drain on FHA’s reserves.
“Fairness dictates that future [reverse mortgages] do not adversely impact the overall health of FHA’s insurance fund, which supports the financing needs of younger, mostly first-time homeowners with traditional FHA mortgages,’’ . Carson said in a prepared statement. “We’re taking needed and prudent steps to put the . . . program on a more sustainable footing.”
America’s seniors do indeed deserve to enjoy dignity and financial security – objectives already furthered by a panoply of well-funded programs. Better for government to help them openly than through nontransparent means such as federally insured speculation on home prices.