Changes to the Reverse Mortgage

FHA to Tighten Mortgage Programs

December 18, 2012, 4:43 p.m. ET


The Federal Housing Administration said it will tighten mortgage standards
for certain homeowners and limit the amount of money that can be
borrowed through its popular reverse-mortgage program as the agency
faces ballooning losses.

Carol Galante, the FHA's acting commissioner, in a letter Tuesday to Sen.
Bob Corker (R., Tenn.) said the changes would be implemented by Jan. 31.

The changes include suspending the FHA's most popular reversemortgage option that allows Americans 62 or older to take cash out of their
homes in a large, upfront payment. The agency will instead promote a
smaller product called the Home Equity Conversion Mortgage Saver, which
allows seniors to take less cash out of their homes.

Suspending the larger of the reverse-mortgage offerings "is an immediate
stopgap measure," Ms. Galante said in her letter. The agency will also
begin taking other steps to strengthen consumer protection and risk
management for reverse mortgages, she said.

The FHA's independent annual audit released last month found that the
agency's reserves wouldn't be enough to cover projected losses over the
coming years, resulting in a $16.3 billion deficit, including $2.8 billion from
the reverse-mortgage program.

In 2009, as home values plunged, Congress boosted the maximum home
value that seniors could borrow against, fueling more demand for reverse
mortgages. Private offerings of reverse mortgages disappeared as the
housing bust deepened.

In Tuesday's letter, Ms. Galante also committed to increasing underwriting
standards for borrowers with credit scores between 580 and 620 by
establishing stricter limits on how much total debt borrowers could have as
a share of their incomes. The FHA doesn't have a minimum credit score,
but requires borrowers who have scores below 580 to have at least a 10%
down payment, compared with 3.5% for borrowers with higher credit

The proposed changes will also impose a minimum down payment of 5%
for mortgages that exceed $625,500. Those loans are available only in
certain high-cost areas, including New York, Los Angeles and Washington,

"While this is only a first step, I am encouraged that Acting Commissioner
Galante has committed to structural reforms that we both believe put FHA
in a much stronger position," Sen. Corker said in a statement.
Sen. Corker said that he would support Senate confirmation for Ms.
Galante, who is President Barack Obama's nominee to serve as the
agency's commissioner.

The FHA doesn't actually make loans, but rather insures lenders against
losses. It has played a critical role helping the housing market by backing
mortgages of borrowers who put little money down. It has accounted for
nearly one-third of loans used to purchase homes over the past year.
The FHA last month said it would also increase insurance premiums and
eliminate a policy that allowed borrowers' insurance policies to lapse after
five years and after their homes had at least 22% equity.

Unlike private lenders, the FHA never relaxed its lending standards during
the housing bubble. But as lenders tightened up following the collapse of
the private mortgage market in 2007 and, later, the government takeovers
of Fannie Mae FNMA -1.15%and Freddie Mac FMCC +0.68%in 2008, it has
seen record loan volumes.