House Financial Services Subcommittee on Insurance, Housing and Community Opportunity Hearing
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Chairman Biggert, Ranking Member Gutierrez and Members of the Subcommittee, thank you for inviting me to testify today. My name is
EQUITY EXTRACTION IN HOUSING
Beginning in 1995, American households began extracting equity from their housing in ever growing numbers (see Figure 1). This effectively removed the equity cushion and increased the loss severity on mortgages when the housing bubble burst. n1
In the mid-to-late 1990s, the
The loan balance can increase over time if an interest rate is charge on the equity extraction amount. The
THE FHA'S REVERSE MORTGAGE PROGRAM FOR SENIORS
The FHA has a similar reverse mortgage program for seniors to the
FHA insurance for HECMs protects the lender rather than the borrower. In the event that the amount owed by the borrower exceeds the value of the property, the loss to the lender will be covered by FHA. But under the reverse mortgage program, any payments due the borrower are also protected. HUD has a legal obligation to make such payments in the event that the lender does not. So, HUD is "on the hook" for negative equity in a home (as well as defaults due to failure to pay property taxes and maintain property insurance). n5
The costs to seniors, aside from the usual fees associated with lending are that FHA guaranteed HECMs may have an initial FHA Mortgage Insurance Premium (2% for HECM Standard product) as well as Annual FHA mortgage insurance (1.25% of reverse mortgage balance). n6
The costs to taxpayers are the losses absorbed by HUD for the housing price shortfall, default and support. As our population ages and reverse mortgages become more common, we have to be careful about projected losses to taxpayers from yet another housing subsidy program.
THE FHA'S DILEMMA
The FHA, HUD and the Federal government face enormous challenges going forward. Federal debt held by the public is currently
On the housing finance front,
This brings us to the FHA. The FHA is deeply insolvent with insufficient capital. The FHA Is estimated to have a current net worth of -
The question remains as to why the Federal government is guaranteeing and subsidizing reverse mortgages for seniors. Stated differently, why do taxpayers have to subsidize seniors who want to stay in their homes when the simple solution is to let seniors sell their home and either rent another dwelling or purchase a smaller dwelling that meets their needs?
I am not against reverse mortgages as an equity extraction tool. But I do not see any reason for the Federal government to guarantee and subsidize it. And we need to stop micromanaging the home ownership decisions for American households.
At a minimum, the Federal government should get out of the reverse mortgage insurance and subsidization business, particularly since there is an easy alternative: seniors sell their home and buy a smaller dwelling or rent.
We have thrown enormous subsidies at the housing market and have tried to steer households into ownership, then renting and now steering seniors toward equity extraction. We need to think about how much of the housing market should be subsidized (mortgage interest deductions, subsidized mortgage insurance, low down payment loans, etc.). Clearly, the massive subsidization has distorted housing and housing finance market and changes should be made.
There are numerous proposals for ending the government housing monopoly. n13 These include eliminating
A reverse mortgage for seniors is a reasonable idea, but should not be guaranteed by the Federal government. It is an ownership decision and the Federal government must stop trying to micromanage this decision, particularly since there is an easy alternative that does not require government guarantees.
n4 HUD announced on
n5 When the reverse mortgage loan balance gets to 98% or more of the "maximum claim amount", which is the maximum amount that can be collected, lenders are allowed to assign the loan to HUD and be paid the balance. HUD then assumes responsibility for making any additional payments that are due the borrower. HUD will also take over responsibility if, for some reason, the lender cannot make the required payments.
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-112-BA04-WState-ASanders-20120509.pdf
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