Former FHA Commissioner Brian Montgomery, who oversaw the nation’s most popular reverse mortgage product for nearly five years, sees a "pivotal" year ahead for the industry that allows seniors to tap the equity in their homes.

"This is a service that helps solve a social need," said Montgomery, now a partner in a Washington, D.C.-based consulting firm. "Because of cash shortfalls in the program, the amount seniors can borrow will be reduced for the second time. In the big picture, the number we’re talking about amounts to a rounding error in the federal budget."

In 1989, the Federal Housing Administration agreed to insure the Home Equity Conversion Mortgage (HECM) program. It gradually garnered market share because it not only allowed owners over 62 to stay in their homes for as long as they wished, but it also protected the owner in the event the lender went out of business.

In 2009, the program’s fund suffered a $198 million shortfall that was generally attributed to loss of home values, national media stories about unscrupulous lenders and a call by some legislators to keep reverse mortgages from becoming the next subprime debacle. In 2010, the shortfall is expected to be $250 million.

"It’s a pivotal year for reverse mortgages and HECMs because of all that’s gone on," said Montgomery, who stayed on as FHA commissioner through the first six months of the Obama administration in 2009. "Seniors look at all these layers that start with the bad press and become reluctant about participating.

"Of course, you’ve got a few members of Congress who now think they can save seniors from all that’s bad in the world and seniors read about that. Well, there just happens to be bad attorneys, veterinarians — even umpires. But we’re investigating HECMs? Give me a break …"

A bright light for reverse mortgages has been recent Wall Street interest. Fixed-rate mortgages have made them more attractive as an asset class, similar to the secondary market that exists for conventional "forward" mortgages. More investor interest means fewer fees for consumers.

"It’s gone from a vicious circle to virtuous circle," said Joe Kelly, an analyst for New View Advisors, a firm specializing in banking and economics. "One investor is no longer buying everything. The HECM has reached the world of more normal economics."

The credit crisis has decimated the "jumbo" reverse market. Wall Street investors not only were shy about buying loans secured by real estate, but they were also opposed to acquiring jumbo packages with adjustable-rate mortgages. Lehman Brothers, which filed for bankruptcy protection in September 2008, was the world’s biggest supplier of jumbo reverse mortgage funds.

On the surface, the HECM limit of $625,500 is viewed as hovering in jumbo territory because the maximum qualifying amount is greater than the conventional threshold of $417,000. However, because of the shortfalls, the Principal Limit Factor (PLF) has been tweaked to reduce the net amounts seniors can receive. The PLF is a complicated calculation that also includes the age of the borrower and price of the home. Older persons are eligible for more reverse mortgage funds.

The ironic piece is that FHA was never designed to take on the bulk of the nation’s home financing and it now finds itself as a huge player in the reverse and "forward" markets.

When government accepted responsibility for providing low-income housing, it was at the local level, particularly by county government. With the collapse of the banking system in 1929, the federal government was forced to produce solutions to what quickly became a national housing crisis. The Housing Act of 1934 created the FHA primarily to help low-income families and first-time homebuyers.

The popularity of FHA loans had dwindled in the past decade, as the private market had grown more sophisticated and efficient at creating and providing mortgage money. Early last year, lenders returned to the security that FHA provides in droves for their borrowers in all categories.

"FHA was built as a backstop, not a primary (player)," Montgomery said. "When I came in 2005, FHA had about 3.5 percent of the forward market. Now, it has upward of 30 percent of the market, plus the HECM, and basically the same number of employees."

After all he’s seen and learned about reverse mortgages, would he encourage his own mother to get one?

"I told her that I was her son and would always be looking out for her best interests," Montgomery said. "I also told her that I administered the program for the United States of America and thought it was a pretty good idea."

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