President Obama's new budget includes $800 million request for funding reverse mortgages. This is the first time that the Reverse Mortgage program has needed tax paying subsidisation. In the past the insurance premiums collected on each reverse mortgage was sufficient to cover the losses and projected losses in the program. The insurance premium is 2% of the Max Claim amount plus .5% of the accrued balance monthly. Many borrowers complain about this amount, it is one of the largest expenses in the transaction, but it is not currently enough to cover the programs losses.
A few things have changed the dynamic causing this shortfall for the first time ever: Extremely low interest rates and Dropping home values.
Low Interest Rates:
The reverse mortgage calculations are based on 10 Year Treasury (while the actual rate is based on the 1 year treasury). The idea behind this being that the 10 Year should reflect where interest rates will be over time to compensate for increases. In the last few years, interest rates were driven to such low levels that the 10 Year Treasury did not accurately reflect the rates that were most likely to occur over the life of the Reverse Mortgage. To compensate for this change in rates, FHA/HUD put a 'floor' into the HECM program by not increasing principal limit factors for any rate under 5.56%. This floor of 5.56% will help protect the long term stability of the fund by not allowing severe temporary drops in interest rates to set unrealistic principal limit models. You can see this in the HECM factor tables, as all rates below 5.56% (this highest rate that rounds down to 5.5%) are the same.
Dropping Home Prices:
When FHA/HUD designed the principal limit tables they used a long term average for property appreciation. The downside to this occurs in times like this where there is a temporary shift in property appreciation (in this case, negative appreciation). When property values drop and a HECM borrower passes away, HUD must make up the short fall. In the reverse though when a home has significant appreciation HUD does not get any of the upside, it all goes to the Homeowner's family. So in times of lowering values HUD takes all of the loss, but in times of property appreciation HUD is unable to take any of the gains. This has created a temporary situation where HUD is experiencing a higher than usual amount of claims.
Unfortunately for HECM borrowers, if this situation does not correct itself, HUD may have to revise the hecm factors using a lower amount of property appreciation. This would result in HECM borrowers receiving less of the equity from the reverse mortgage transaction.