Taxpayers are on the hook
This article appeared in No matter how much the banks lend, the transaction is almost risk-free for them because it is guaranteed by the federal government through the insurance fund.
That insurance comes into play in certain situations, including when a loan goes into foreclosure after the death of a borrower with no heirs or when a borrower fails to pay taxes and insurance on the property. It also can occur if the proceeds from the sale of the house won't cover the balance owed, as is often the case with declining home values. Together, those two categories of lenders' claims against the federal insurance fund have grown to a cumulative total of $109.4 million from late 1993 through May of this year.
But an even bigger source of claims on the insurance fund is loans that have neared their limit. The bank can be reimbursed by the insurance fund once the balance owed on the mortgage reaches 98 percent of the loan's maximum lending limit, a dollar amount set at the time the mortgage is approved. The FHA then pays the lender 98 percent of the loan and takes on responsibility for servicing the loan as long as the borrower lives at the property. Just how many of those claims will result in insurance-fund losses won't be known until those homes are sold.
As more reverse-mortgage balances hit that 98 percent figure, that category of claim payouts to lenders is now by far the largest, totaling more than $1.36 billion by May 2009, up from $128,753 in late 1993.
Claims by lenders vary markedly, our study shows. One of the biggest lenders, Wells Fargo, sought or issued claims for 2 percent of the 115,075 loans it generated. But that figure was 25.1 percent for AmeriFirst Mortgage Corp., which issued 1,856 mortgages, primarily in the Northeast. Part of the reason could be that AmeriFirst issued its loans in the early years of the program and none in recent years. As loans age, there is a growing likelihood they will tap the insurance fund, adding to the concerns about the program's future.
But there's also a worrisome trend among newer loans, according to our study. Although the numbers are small, loans issued in 2005 were more than twice as likely to result in a claim on the insurance fund three years later as loans issued in 2002. That suggests that some borrowers might be exhausting their equity sooner than expected and that the government might face the prospect of more bailouts down the road.
Borrowers pay hefty premiums for the federal insurance backing these loans—up to $6,000 up front plus fees that equal 0.5 percent of the principal amount each year—but lenders reap the benefits.
Until now, income from the insurance premiums that reverse mortgage borrowers pay has more than covered payouts to settle claims, but HUD's request for money is an indication of possible red ink ahead. Burns at the FHA says the growth in claims is simply a shift that reflects the longevity of some loans.
But with almost $800 million in reserve funds requested, officials are concerned. "We're talking about a huge growth in the potential liability to the American taxpayer," says Sen. McCaskill. She asks, "If this is a good lending tool and a good value for the federal government, then why isn't there a proprietary market for reverse mortgages now?"
The insurance-fund claims might also grow as borrowers have trouble paying for the upkeep, property taxes, or insurance on their homes. FHA rules require lenders to take foreclosure action in such cases, but none has done so to date, Burns says. Bell, of the reverse-mortgage lenders association, says the issue has been "a political hot potato" because neither HUD nor the Federal National Mortgage Association (Fannie Mae), which purchases reverse mortgages on the secondary market, wants to "be accused of throwing Grandma out of her house."
