The insurance fund may not be enough to handle secured loans

Banks are protected by insurance

Secured loans are causing much concern with financial experts. They are reporting that no matter how much banks lend, their transactions are almost always risk-free. Their money is guaranteed by the federal government through the insurance fund. The insurance fund is money that comes into play when various “bad” things happen to borrowed money. For example, when a property goes into foreclosure and the owner had no heir, the insurance fund covers the lending institution’s investment. Or, if the sale of a home is much less than its mortgage value, the insurance fund covers the loss to the bank. Homes falling into these two categories alone make up about $109 million in claims against the federal insurance fund from financial institutions.

Homes that are nearing their lending limit

Another huge cut of the insurance fund comes from loans that have neared their limit. The bank can be reimbursed by the fund once the balance owed reaches 98% of the loan’s maximum lending limit. The maximum lending limit is a cap determined at the time the mortgage is approved. The FHA pays the lender 98% of the loan and it takes the responsibility of managing the loan. Reverse mortgages are making up a huge portion of the loans that reach the 98% lending limit. In fact, they total about $1.36 billion.

The trend with new loans

There is a concerning trend with newer loans entering the market. A study of the lending market showed that loans issued in 2005 were more than two times as likely to result in a claim on the insurance fund as loans issued in 2002. The trend suggests that borrowers are using their equity more readily than in previous years. As a result, the government may need more bailouts in the future to handle the added financial strain. Borrowers are the ones who pay for the federal insurance to back these loans, but lenders are the ones who directly benefit. Some borrowers pay up to $6,000 in up-front fees and that equals about 0.5% of the principle amount of the secured loans every year.

How HUD plays a part

In past years, income from insurance premiums paid by reverse-mortgage customers was sufficient to cover the payouts to settle claims to the insurance fund. That is quickly changing. HUD is requesting more money from the government and that suggests that the fund may be depleted in the near future. So far, there is an $800 million in reserve funds requested to cover loans. Senator Claire McCaskill said, “We are talking about a huge growth in the potential liability to the American taxpayer. If this is a good lending tool and a good value for the federal government, then why isn’t there a proprietary market for reverse mortgages now?”

The future of the insurance fund

Experts are projecting that the insurance fund will experience a considerable growth in claims in coming years. The reason is that more borrowers are expected to have difficulties paying for their home’s upkeep, taxes, and insurance coverage. Secured loans in the form of mortgages are expected to balloon in the near future and the strain may make it difficult for the insurance fund to remain an option for backing financial institutions.

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