It’s not often that expanding a government program is good news for taxpayers’ pocketbooks. But according to a press release from [tag]Congressman Ed Case[/tag] (D-HI), legislation ([tag]HR 5121[/tag]) aimed at growing HUD’s [tag]HECM[/tag] reverse mortgage program will be a financial winner for the government.

This legislation would make it possible for the [tag]FHA[/tag] to guarantee an additional 80,000 loans valued at about $20 billion in 2007. This would be in addition to 20,000 loans valued at $5 billion that the CBO estimates would be insured during the first quarter of fiscal year 2007.

The bill also would set a single nationwide loan limit for the [tag]reverse mortgage program[/tag] and allow borrowers to use the loans to purchase a new home. This will help the increasing number of seniors who are searching for new housing within senior communities.

The [tag]CBO[/tag] estimates that the bill would save the federal government $2.3 billion over the 2007-2011 period. The savings would stem from increasing the number of homeowners who could obtain [tag]loan insurance[/tag] under the HECM program and under FHA’s single-family loan insurance program. The increased collections would offset the cost of the program because the fees paid by borrowers generally exceed the cost of expected defaults, according to the [tag]GAO[/tag]. As a result, enactment of the bill would not affect direct spending or revenues. (Emphasis added.)

Although the government’s net “profit” from the HECM program will increase $2.3 billion, the Congressional Budget Office notes that the proposed changes will also raise the FHA’s risk and, in percentage terms, make government profits somewhat less than they currently are:

Under current law, FHA guarantees of HECM loans result in net offsetting collections to the federal government because guarantee fees for those mortgages more than offset the costs of expected defaults, resulting in net collections from the loan guarantee program. For 2007, the Administration’s subsidy estimate is -2.8 percent. Under the expanded program authorized by H.R. 5121, CBO estimates that the subsidy rate for the HECM loans would be -1.2 percent. This reduction from the estimated rate for 2007 is due to the increased risk FHA would experience under the proposed nationwide loan limitation. With larger loan sizes, the equity cushion (i.e., the difference between the home’s value and the potential cost of a claim payment) would decrease, leading to potentially more costly claims for FHA.

Of course, all of these figures are just estimates and actual outcomes won’t be known for years. It’s prudent for the government to move conservatively in expanding the HECM program. Still, if the program maintains healthy profit margins, hopefully at some point in the not too distant future another reform measure can be considered to lower the FHA insurance fees paid by borrowers.

Social tagging: Reverse Mortgage News

A Few More Related Articles of Interest:

Fannie Mae

Wall Street Journal: Hold Off on Getting a Reverse Mortgage

Reverse Mortgages: Information You Need to Know

H.R. 2895 and HECM Insurance Costs

Lessons In Reverse Mortgage Fraud