While reverse mortgages have become a bigger part of the senior population’s financial picture, the nation’s most popular program has undergone a mandatory change that will reduce the total proceeds available to FHA-insured reverse mortgage borrowers.
The move is in response to a projected $798 million shortfall in the Federal Housing Administration’s budget for the Home Equity Conversion Mortgage in 2010. FHA is shouldering a greater portion of the residential loan load, and its insurance component has come under greater scrutiny because of it.
In a recent letter to all reverse mortgage lenders, David Stevens, HUD’s new Assistant Secretary for Housing- Federal Housing Commissioner, said changes in the agency’s popular Home Equity Conversion Mortgage program were necessary “to assist with the viability of the program.”
A reverse mortgage enables senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.
Because Congress is unlikely to approve a credit subsidy for the home equity conversion program, HUD plans a 10 percent reduction in the “principal limit factor” on all reverse mortgages applied for on or after Oct. 1, 2009. This factor reduces available proceeds to reverse mortgage borrowers.
Here is one example of the new maximum amounts with the principal limit factor:
•A 71-year-old borrower in a $370,000 home with a HECM fixed-rate loan at 5.56 percent: total cash available (after closing costs and set-asides) is $240,436 through Sept. 30, 2009; and $211,511 on or after Oct. 1.
“While the result will be an increased number of borrowers who are short funds to pay off existing liens or mortgages, it is important for the industry to keep in mind the fact that this reduction is the equivalent to less than a 1 percent increase in interest rates,” said Sarah Hulbert, chief executive officer of Senior Financial Corp., a reverse mortgage lender. “We were at that level less than a year ago.”
More than 450,000 HECMs have been made since 1989, the year FHA launched its reverse mortgage pilot program. FHA insured about 112,000 HECMs in 2008, up from 107,367 in 2007 and 43,131 in 2005.
While most reverse mortgages typically have been used by older homeowners to help them “age in place,” the loans also enable seniors to buy homes. The HECM for purchase program allows owners over 62 to make a large downpayment on a new home and use the reverse mortgage as permanent financing.
Maximum loan fees on reverse mortgages are 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.
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