Bailout for seniors' 'reverse mortgages' needed

WASHINGTON - Falling home prices have forced the government to ask Congress for a $798 million taxpayer subsidy to prop up a program that lets senior citizens tap the equity in their homes.

The government said yesterday that the Federal Housing Administration needs the money to support a program that lets homeowners over 62 obtain "reverse mortgages" to borrow against their equity.

A reverse mortgage allows borrowers to convert equity in their homes to cash, without making payments until they die or sell their home. Interest is due at that point.

But with home prices projected to appreciate slowly, if at all, over the next few years, lenders that participate in the government program may not be able to collect the full loan amount from some borrowers. The government, which insures lenders that participate in the program, is on the hook if the house is sold for less than the total loan amount.

Borrowers can draw on about 60 percent of their home's equity. But they also are allowed to receive payments monthly for the rest of their lives, without any cap.

If they live longer than expected and home prices rise slower than expected, that could mean losses for the program.

Reverse mortgages are becoming more popular, in part because retiree stock accounts have lost so much value. The National Reverse Mortgage Lenders Association expects 150,000 such loans to be made this year, up 30 percent over last year.

Reverse mortgages are, however, just a small part of the FHA's business. The agency's main function is to make loans to borrowers with small down payments or those with weak credit, and officials stressed that program will not need a taxpayer bailout next year.

As of March, 7.4 percent of loans backed by the FHA were either 90 days overdue or in foreclosure, up from 5.8 percent last August. Lawmakers have been concerned that taxpayers will end up bailing out the main FHA program. Last month, Sen. Kit Bond, R-Mo., called the FHA a "powder keg" waiting to explode. *