A welcome reversal

This is excerpted from an editorial by The Washington Post.

There are many good reasons for the federal government to intervene in the economy, but diverting resources from less affluent firsttime home buyers to seniors who already own homes would not be at the top of our list. Nevertheless, that is what the Federal Housing Administration’s Home Equity Conversion Mortgage program — commonly known as the “reverse mortgage” — essentially does. Kudos to the Trump administration for deciding last week to rein in this dubious use of the federal balance sheet.

Basically, a reverse mortgage lets homeowners 62 and older borrow from private lenders, secured by the equity in their homes. Lenders get paid back from the proceeds of a sale when the homeowner moves or dies; if home prices go up, the returns can be sweet indeed. In fact, lenders get paid no matter what, because FHA insures the loan in return for an upfront fee and monthly premiums. More than 18 percent of reverse-mortgage loans taken out from 2009 to June 2016 are expected to go into default, according to an internal government report.

Since 2009, reverse-mortgage losses have cost FHA’S reserve fund $12 billion. This same reserve fund is supposed to backstop lending to low-income newcomers to the housing market, however — and it is in that sense that reverse mortgages constitute a perverse redistribution of resources.

The new rules for the program announced by Ben Carson, the secretary of housing and urban development, will require new would-be borrowers to provide much higher upfront payments while significantly lowering the total amount anyone can borrow.

America’s seniors do indeed deserve to enjoy dignity and financial security. Better for government to help them openly than through nontransparent means such as federally insured speculation on home prices.