The Trump administration is planning to raise premiums and place tighter loan limits on some borrowers in a mortgage program that helps seniors supplement their incomes.
The U.S. Department of Housing and Urban Development on Tuesday plans to announce the changes in a letter to lenders to the so-called reverse mortgage program, which allows seniors to take out a loan against the value of their home. The Trump administration feels the changes are necessary to put the program, which is backstopped by taxpayers, on a sounder financial footing.
“Given the losses we’re seeing in the [reverse mortgage] program, we have a responsibility to make changes that balance our mission with our responsibility to protect taxpayers,” HUD Secretary Ben Carson said through a spokesman.
The modifications won’t apply to borrowers with existing mortgages, but will affect those who take out new loans. Some 650,000 borrowers have outstanding reverse loans insured by the Federal Housing Administration, which is part of HUD.
Most new borrowers will pay bigger premiums upfront but lower ones over the life of the loan, lessening the risk to taxpayers if seniors live longer than predicted. Borrowers will now pay 2% of the amount of the home’s value upfront and 0.5% annually over the course of the loan.
Currently, most borrowers pay 0.5% upfront and 1.25% annually over the remainder of the loan. Some who borrow more than 60% of the amount they can borrow against the home in the first year already pay 2.5% upfront so they will see premiums go down slightly.
On balance, most seniors will also be able to borrow less money. The average borrower at current interest rates will be able to borrow roughly 58% of the value of their home, down from 64%. But those limits vary significantly based on interest rates and the age of the borrower. While most seniors at current interest rates will be able to borrow less, some may be able to borrow more if rates rise.
The Federal Housing Administration’s reverse mortgage program allows seniors to take out loans from private lenders against their homes to supplement pension income and help those on fixed incomes deal with unexpected or rising expenses. When the borrower moves or dies, the lender that originated the reverse mortgage takes possession of the home and sells it, and the proceeds are used to repay the loan.
But the program also carries significant risks for the federal government, which backs the loans.
The Federal Housing Administration covers the losses on the loans from a reserve fund that is supported primarily by premiums paid by younger borrowers on traditional FHA mortgages. Since 2009, the reverse-mortgage program has drained nearly $12 billion from that fund.
“You have this cross-subsidy from younger, less affluent people who are trying to achieve homeownership,” said Adolfo Marzol, a senior adviser at HUD.
In 2013, FHA required a one-time $1.7 billion appropriation from the U.S. Treasury, largely due to losses from the reverse-mortgage program.
Lenders use actuarial tables to determine how much borrowers are eligible to receive. But making predictions for 15 to 20 years in the future is an inexact science and the loans can end up losing money if home price growth is slower than expected, seniors don’t keep the homes in great repair or they live longer and more interest accrues on the loan.
Without changes, federal officials say that the program is placing an increasingly large burden on the reserve fund and within the next couple of years FHA would require an appropriation from Congress to keep backing reverse mortgages. It is also indirectly hurting HUD’s ability to lower premiums on forward mortgages by putting pressure on the reserve fund, officials said.
On Inauguration Day, the Trump administration announced that it was suspending an Obama administration directive to reduce premiums on traditional FHA mortgages by a quarter of a percentage point.
Advocates for the program, who hadn’t yet been briefed on the changes, acknowledged that it has issues that need to be addressed but said it remains a critical resource for many seniors.
“Being able to survive retirement when you don’t have necessarily have a large 401(k), that creates the real risk of just being able to pay the bills and eat food and stay in a home,” said David Stevens, president of the Mortgage Bankers Association and a former FHA commissioner.