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Consumer Advocates: HECMs Need Revisions to Prevent Defaults

Home Equity Conversion Mortgages (HECMs) and reverse mortgages, tools to which many seniors turn to help manage expenses in their later years, can be challenging products to navigate, according to testimonies delivered during a Senate committee ""hearing"":http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=5d663326-d3b2-4e83-9f34-1a6ac5e4d5ce Tuesday morning.

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While the Department of Housing and Urban Development (HUD) considers changes to the HECM program, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing to determine the best path forward for the program.

Amid his recommendations, Peter H. Bell, president and CEO of the National Reverse Mortgage Lenders Association, highlighted the important fact that any changes HUD chooses to make to the HECM program ""can only be made by the full regulatory development process,"" which Bell says can take a year and a half or longer.

""Therefore, the most productive action Congress can take is to provide HUD with the administrative authority to make changes on a more expeditious basis,"" Bell said.

HUD's proposal, as detailed by Bell includes ""financial assessment of borrowers,"" ""principal limit utilization restrictions,"" and ""tax and insurance set-asides.""

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These changes ""would not only protect the FHA insurance fund, but simultaneously provide yet another level of safeguards for consumers,"" Bell said.

Ramsey Alwin, senior director of economic security at the National Council on Aging, concurred in her testimony that HUD's three proposed changes ""can be useful tools in assuring that a borrower can sustain the financial obligations associated with obtaining a HECM.""

One of the challenges of the current HECM program repeatedly highlighted during the hearing is that borrowers often take large sums of money upfront and sometimes default on property taxes and insurance in years to come.

Alwin referred to data from the Consumer Financial Protection Bureau revealing that 70 percent of HECM loans are fixed rate full draw loans.

""Reverse mortgages can bring new risks to people who may have limited experience dealing with large sums of money,"" Alwin said.

In fact, almost 10 percent of HECM borrowers ""are at serious risk of losing their homes due to defaults on their property taxes and insurance,"" according to testimony from Odette Williamson, staff attorney at the National Consumer Law Center.

While Williamson expressed support for HUD's proposal aimed at assessing a borrower's ability to make tax and insurance payments before doling out HECM and reverse mortgage loans, she expressed concern that ""the rules applicable to existing borrowers who face foreclosure because of unpaid taxes and insurance still need a complete overhaul to prevent unnecessary foreclosures which not only displace elders but drain the [Mutual Mortgage Insurance Fund].""

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