One of the lesser known facts about HECM reverse mortgages is that the insurance premiums the FHA charges more than offset the costs/risk the government takes on because of HECMs. In short, the government makes money money on each HECM reverse mortgage. Here’s a pertinent quote from a recent Congressional Budget Office (CBO) analysis of H.R. 1852 (”Expanding American Homeownership Act of 2007″) a bill pending in Congress which would, among other things, help expand the HECM program:

Under current law, FHA guarantees of HECM loans are estimated to result in net offsetting collections to the federal government because guarantee fees for those mortgages are currently estimated to more than offset the costs of expected defaults. For 2008, the Administration’s subsidy estimate for HECM guarantees is -1.9 percent. Under the expanded program authorized by H.R. 1852, CBO estimates that the subsidy rate for the HECM loans would be -1.35 percent. This reduction from the estimated rate for 2008 is due to the increased risk FHA would experience under the proposed nationwide loan limitation. With larger loan sizes, the “equity cushion” (that is 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.

On the other hand, one of the better known facts about HECM reverse mortgages is that upfront costs (including the 2% FHA mortgage insurance premium - MIP) are very high and pose a major obstacle for many seniors considering a reverse mortgage. It would seem reasonable that to the extent MIP charges could prudently be reduced without jeopardizing the soundness of the program, doing so would directly benefit seniors and help spur further development of the HECM program.

But a bill introduced in the U.S. House of Representative (H.R. 2895,”National Affordable Housing Trust Fund Act”) earmarks profits from HECM MIP premiums and allocates them to funding a newly established “affordable housing trust fund.” According to a review of H.R. 2895 in Builders Online:

Under the bill, the trust fund would draw from a portion of the profits from FHA mortgage insurance premiums paid by reverse mortgage borrowers. Reverse mortgages, also known as home-equity conversion mortgages, are available to homeowners ages 62 and older who either have paid off their mortgages or have small balances. They can borrow against the equity in their homes to provide them with monthly income or use it as a line of credit as long as they continue to live in their home. The loan is repaid when the house is sold, with the balance going to them or their heirs. If the sale amount is less than the balance due on the loan, HUD pays the shortfall. In testimony before the House Financial Services Committee last month, FHA Commissioner Brian Montgomery said that FHA receipts are already credited toward HUD appropriations.

NRMLA (National Reverse Mortgage Lenders Association) says it hasn’t taken an official position on H.R. 2895 but is actively working with HUD/FHA to reduce MIP costs by other avenues.

Still, it seems to us that once “excess” HECM mortgage insurance premiums are diverted to another program, like the affordable housing trust, chances for MIP premium relief are greatly diminished. The new program will come to rely on the HECM-MIP income stream and significant pressure may come from constituencies far removed from reverse mortgages to maintain (or increase) the cashflow.

We’ve put up a poll on this issue in the new RMI Forum, so feel free to cast your vote and leave any comments you have there.

Social tagging: H.R. 2895 > HECM > HECM fees > reverse mortgage fees > Reverse Mortgage Pitfalls

A Few More Related Articles of Interest:

Reverse Mortgages and Subprimes - Are there Parallels?