The Federal Housing Administration is moving quickly to reduce by 10% the proceeds that seniors can receive from an FHA-insured reverse mortgage, industry sources said.

Peter Bell, the president of the National Reverse Mortgage Lenders Association, said the FHA is expected to send a letter to lenders as soon as this week on the cut, which could go into effect Oct. 1, the beginning of government's fiscal year.

Sources said the agency is making the cut because its Home Equity Conversion Mortgage program faces an estimated $800 million shortfall as a results of declining house prices, and it appears that congressional appropriators will not cover the shortfall.

An analysis by Bell's trade group of loans made by three large Home Equity Conversion Mortgage lenders found that 21% of seniors would not be able to pay off their mortgages if the proceeds available from reverse mortgages were cut by 10%. Seniors who need a reverse mortgage to stay in their homes might be forced to sell or could face foreclosure because of the reduction, Bell said.

The FHA would not discuss the matter.

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