The FHA insures reverse mortgages made by approved lenders. In the event the loan balance approaches what the FHA calls the maximum claim amount against the property, the lender can assign the loan to the agency and be paid the balance owed. Earlier this year, Obama administration budget officials told the FHA that, based on their projections of home price movements during fiscal 2010, the reverse mortgage program would need by Oct. 1 a subsidy of $798 million to cover a widening gap between estimated balances extended to borrowers and the property values backing them.
The gap could be filled in one of several ways, budget officials said, including congressional appropriations, a reduction in principal amounts, or an increase in insurance premiums charged borrowers. Ultimately the agency chose to limit principal amounts.
Stevens said in a statement that "we are taking steps to make certain the (reverse mortgage) program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option."
Reverse mortgages increasingly have been used by seniors as a financial planning tool. Homeowners are often able to extinguish their mortgage debt - stop paying out hundreds or thousands of dollars a month -- and convert their home equity into a cash resource or income stream. This is especially important for seniors who are on financial tightropes.
Though the new 10 percent cutback may make things tougher for them during the coming year, Bell and others are working on plans to reduce the impact. One idea, he said, is to allow seniors' current lenders to agree to accept less than a full payoff, given the diminished reverse mortgage proceeds available. The unpaid balances could then be recast as junior liens secured by the property, repayable over an agreed-upon term of years, or in a lump sum with interest at the time of sale of the house.