As uncertainty over the future outlook of the U.S. economy looms, the Federal Housing Administration (FHA) worries that inflated home values will create market turbulence.
Cezary Podkul of the Wall Street Journal writes, “the FHA insures about 11% of all U.S. single-family residential mortgage debt.”
Of this debt, reverse mortgages, formally known as Home Equity Conversion Mortgages (HECMs), are a chief concern. A recent in-house analysis revealed to the FHA that 37% of 134,000 reverse mortgages are overvalued by 3% or more.
In a reverse mortgage, homeowners receive money over time for the equity they own in a home. But if homes are overvalued, then lenders are at risk of paying out more money to homeowners than they will receive when the home is sold.
Podkul reports, “Reverse mortgages constitute only about 6% of the insurance portfolio [for FHA], yet they’re responsible for all of the fund’s expected future losses.”
To respond to such risk, the FHA announced in September that it would require a second appraisal for certain reverse mortgages.
Looking ahead, housing prices should be watched carefully as they are a key indicator in the confidence of the U.S. economy. The National Association of Realtors recently reported, “Existing-home sales declined in September after a month of stagnation in August.”