Back to General Resources

House Financial Services Subcommittee Hearing on FHA’s HECM Program

House Financial Services Subcommittee on Housing, Community Development, and Insurance

“Protecting Seniors: A Review of the FHA’s Home Equity Conversation Mortgage Program”

Wednesday, September 25, 2019

Key Topics & Takeaways

  • Reform Proposals: Goodman explained that the financial assessment was a big step forward in improving the HECM program but suggested that a set-aside for property charges become the default. Cackley said FHA needs to improve its oversight, including of servicers, to ensure repayment plans and extensions are made available the way the program intends.
  • Foreclosures & Loss Mitigation: Mancini said that many reverse mortgage borrowers facing a foreclosure based on property charges are not able to get a repayment plan or loss mitigation option because servicers are not required to provide one and are worried about being financially penalized for not foreclosing fast enough, adding that HUD making loss mitigation mandatory is critical and would allow for more flexibility so seniors are not forced into bankruptcy or foreclosure.

Witnesses

  • Sarah Bolling Mancini, Staff Attorney, National Consumer Law Center
  • Alicia Puente Cackley, Director, Financial Markets and Community Investment, Government Accountability Office (GAO)
  • Peter H. Bell, President & Chief Executive Officer, National Reverse Mortgage Lenders Association (NRMLA)
  • Laurie Goodman, Vice President, Housing Financial Policy, Urban Institute

Opening Statements

Chairman Lacy Clay (D-Mo.)

In his opening statement, Clay noted that the hearing would explore the racial wealth gap as it pertains to reverse mortgages, particularly the Home Equity Conversion Mortgage (HECM) program run by the Federal Housing Administration (FHA). Clay said HECMs can make a real difference in the lives of seniors by providing personal and financial stability, a flow of income and peace of mind. Clay pointed out, however, that in many communities HECM loans are in foreclosure, putting the elderly at risk of eviction and homelessness. He continued that despite attempts by Congress and the Department of Housing and Urban Development (HUD) to prevent foreclosures, nearly 100,000 reverse mortgages have failed, with African American neighborhoods facing a disproportionate impact, adding that reserve mortgages end in foreclosure six times more often in predominantly African American neighborhoods than in predominantly white neighborhoods and that this exacerbates the racial wealth gap.

Ranking Member Lance Gooden (R-Texas)

In his opening statement, Gooden stressed the importance of the HECM program, saying it was created to allow seniors to access their real estate equity while making it possible to stay in their homes and age in place. Though he called it a good way to provide opportunities for the elderly, he said there is room for improvement in the program. He pointed to problems concerning HUD servicing procedures, foreclosures and non-borrowing spouses, saying some measure of reform is needed.

Testimony

Sarah Bolling Mancini, Staff Attorney, National Consumer Law Center

In her testimony, Mancini explained the HECM program was created to allow seniors to tap into their home equity without the risk of displacement, enabling borrowing age 62+ to obtain the loan proceeds as a lump sum, line of credit or monthly payments. She continued that seniors are not required to pay back the principal or interest while they live in the home, and the balance grows over time and the loan is paid off when the borrower dies or moves out. She said that without this option, many seniors would have to sell their home or take out a regular mortgage, which is often not affordable and can lead to foreclosure. She noted that on Monday, HUD released a new policy on reverse mortgage non-borrowing spouses, removing the “problematic” deadlines for mortgagee optional election (MOE) which allows a spouse to remain in the home and helps struggling widows and widowers. Mancini said a “significant” unresolved problem is that of property charged defaults, saying that as of 2016, 90,000 reverse mortgages defaults were due to property charges because many borrowers did not understand they were still obligated to pay the property taxes and homeowners insurance. Mancini said HUD should address this by making loss mitigation mandatory for new HECM loans, expanding existing loss mitigation options and providing services with a clear extension of foreclosure deadlines to evaluate loss mitigation. She noted that the draft bill, the Preventing Foreclosures on Seniors Act of 2019, would address many of these issues.

Alicia Puente Cackley, Director, Financial Markets and Community Investment, Government Accountability Office (GAO)

In her testimony, Cackley said HECMs allow seniors to convert home equity into payments from a lender while still living in their homes, saying this can help senior homeowners meet financial needs but can also can present risks to borrowers and spouses. Cackley presented findings from GAO’s recent report on the HECM program, which analyzed FHA data on HECM loan outcomes, including termination prevention options and the extent to which FHA monitors these indicators. According to this analysis, Cackley explained that in recent years a growing percentage of HECMs have ended because borrowers defaulted, an increase from two percent in 2014 to 18 percent in 2018. She said most of these defaults were due to borrowers not meeting occupancy requirements or failing to pay property charges like property taxes or homeowners’ insurance. She noted that since 2015, FHA has allowed loan servicers to put borrowers who are behind on property charges into repayment plans to prevent foreclosures, but as of yearend 2018, only 22 percent of borrowers had received this option. Cackley continued that FHA’s monitoring, performance assessment and reporting for the HECM program have weaknesses, and FHA has not regularly tracked key performance metrics. She recommended that FHA develop analytic tools to better monitor outcomes for its HECM portfolio as well as develop and implement certain procedures, including a risk rating system.

Peter H. Bell, President & Chief Executive Officer, National Reverse Mortgage Lenders Association (NRMLA)

In his testimony, Bell said the HECM program has been largely successful, helping over a million households deploy their housing wealth to live a more comfortable retirement, though he noted there is always a “learning curve” and “room for improvement.” He said that HECM is a “highly misunderstood” financial instrument. He said that foreclosure is often the “routine manner” of terminating a reverse mortgage, noting that lenders must act within HUD’s specified time frame, inhibiting their ability to work with borrowers in default. He noted that HECMs allow for repayment plans, calling it a safeguard for HECM borrowers that is not often available to other homeowners. He said the focus in reforming HECM should be on making the program better, safer and more responsive to the needs of today.

Laurie Goodman, Vice President, Housing Financial Policy, Urban Institute

In her testimony, Goodman said many Americans lack the financial assets for a comfortable retirement, and a home is the most commonly held and valuable asset for American families. She explained that seniors are more likely to be homeowners and apt to have more home equity than younger Americans, noting seniors have an 80 percent homeownership rate compared to 64 percent for all households and 43 percent more home equity than homeowners of all ages. She said that equity plays an even larger role in the net worth of African American and Hispanic seniors, saying homeownership accounts for 64 percent and 70 percent of median net worth respectively of these households compared to 40 percent for white Americans. Goodman said HECMs are often the only form of equity extraction available to many lower income and credit constrained homeowners, and reverse mortgage borrowers have the lowest income and lowest credit scores of all equity extraction products. She noted that until 2015, the HECM program had no real credit underwriting, but now there is a financial assessment used to evaluate if the senior can pay taxes and insurance; if it is determined they cannot, a a tax and insurance set-aside is established. Goodman said improvements to the program should focus on improving financial literacy about reverse mortgages overall, simplifying reverse mortgages’ product design, lowering costs, encouraging innovation and redesigning existing programs to reduce foreclosure frequency and loss severity.

Question & Answer

Reform Proposals

Reps. John Rose (R-Tenn.), Emanuel Cleaver (D-Mo.), Clay and Gooden asked various questions about reforms that could be made to the program. Bell responded that strengthened borrower counseling is important. Goodman explained that the financial assessment was a big step forward but suggested that a set-aside for property charges become the default. Cackley said FHA needs to improve its oversight, including of servicers, to ensure repayment plans and extensions are made available the way the program intends.

Foreclosures & Loss Mitigation

Reps. Joyce Beatty (D-Ohio), Maxine Waters (D-Calif.) and Rashida Tlaib (D-Mich.) asked about foreclosures and loss mitigation. Mancini said that many reverse mortgage borrowers facing a foreclosure based on property charges are not able to get a repayment plan or loss mitigation option because servicers are not required to provide one and are worried about being financially penalized for not foreclosing fast enough, adding that HUD making loss mitigation mandatory is critical and would allow for more flexibility so seniors are not forced into bankruptcy or foreclosure.

Disproportionate Effects on Communities of Color

Reps. Al Lawson (D-Fla.), Clay, Cleaver, and Tlaib asked about the disproportionate affects of HECM foreclosure on communities of color and whether such communities are intentionally targeted for these loans. Panelists agreed that African American and Hispanic communities have seen higher rates of foreclosures than predominantly white communities. Goodman said it is unclear whether communities of color have been specifically targeted for HECM loans, but there is data to show that reverse mortgage borrowers tend to have lower incomes, lower credit scores and more debt, and a disproportionate number of African American and Hispanic borrowers fall into this category. She explained that minorities also have more of their net worth invested in their home. Mancini added that though there may not have been deliberate targeting, the history of disinvesting in communities of color and of subprime mortgages may have had an affect on the greater likelihood of reverse mortgages. Cackley noted that HUD has not looked at its data in such a way as to make such determinations.

Loan Counseling

Reps. Bryan Steil (R-Wis.) and Clay asked about loan counseling. Mancini called pre-loan counseling an “important piece of the puzzle” in safeguarding consumers but said there is currently not enough funding for the program. She explained the counseling is often over the phone in a short format, only lasting 30-45 minutes, saying this is not enough time to cover all the issues related to HECM loans including other available assistance, how the mortgage works and the various opportunities to receive proceeds. She said this counseling could be made more effective with better funding that would allow for more time to go into more detail with borrowers.

Lender Competition

In response to a question from Rep. Scott Tipton (R-Colo.) about competition in the reverse mortgage market, Bell explained that the current reverse mortgage landscape is largely dominated by specialty and non-bank lenders. Goodman said that reverse mortgages present a perceived “great deal” of reputation risk, noting that the HECM program is extremely complex compared to traditional mortgages so simplification would make a “big difference” in terms of increasing competition in the market.

Mutual Mortgage Insurance Fund

Rose asked if Congress should be concerned about the health of FHA’s Mutual Mortgage Insurance Fund, to which Cackley replied it is always important to pay attention to the fund.

For more information on this hearing, please click here.