WASHINGTON (AP) — The Federal Housing Administration could limit the size of initial lump-sum payments that lenders offer reverse mortgage borrowers and require escrow accounts to cover taxes and insurance, under legislation the House passed Wednesday.
The bill, passed on a voice vote, is intended to help the government mortgage insurance agency work its way out of financial difficulty.
Reverse mortgages allow people over 62 to borrow against their home equity, stay in their home and use the money for living expenses. They can take lump sum or monthly payments.
Borrowers still must pay property taxes and insurance. Sale proceeds from the home go to the lender when the borrower dies or moves out.
The measure allows the FHA to change the terms for new reverse mortgages that it insures, so the agency doesn't have to follow the normal rule-making process that can stretch out months or even years.
"Hundreds of thousands of seniors currently utilize federal reverse home mortgages," said Rep. Denny Heck, D-Wash., who sponsored the bill with Rep. Michael Fitzpatrick, R-Pa. "We need to act to stabilize the program."
FHA Commissioner Carol Galante said the bill would "greatly assist" the FHA's efforts to make the program financially sound while making sure that "seniors who have worked hard their entire lives can continue to enjoy their home throughout their retirement."
The FHA sought the legislation after incurring big losses in paying out claims for defaulted reverse mortgages when homeowners taking out large lump sum payments later ran into financial problems, often aggravated by falling home prices.
The agency is struggling with more than $5 billion in reverse mortgage losses this year alone may need as much as a $1 billion rescue package from the Treasury to bolster its reserves.
"This bill will greatly assist FHA's efforts to make the (reverse mortgage) program financially sound,
A similar measure has been introduced in the Senate by Sen. Robert Menendez, D-N.J.
In addition to limiting the first draw borrowers may receive and mandating escrow accounts, the FHA plans to require lenders to conduct financial assessments of borrowers.
The FHA is required by law to maintain reserves equal to 2 percent of the portfolio of loans it insures. It currently has about $32 billion in reserves.
The agency has until Sept. 30 to decide whether or not it will need the cash infusion from the Treasury, which does not require congressional approval and would be the first in the agency's 79-year history.
It has raised mortgage insurance premiums this year and started requiring most new borrowers to carry the insurance through the 30-year life of their loans.