Lower Upfront Costs to Be Key Feature of New Version of FHA Home Equity Conversion Mortgages.
The Federal Housing Administration (FHA) announced today that it intends to make modifications to its Home Equity Conversion Mortgage (HECM) product, a reverse mortgage loan insured by the federal government, to make it more attractive and cost effective for older home owners seeking to tap their home equity to cover living expenses and health care costs, according to the National Reverse Mortgage Lenders Association.
A HECM is a reverse mortgage that is insured by the FHA. It is designed to enable elderly homeowners (62 years or older) to borrow against the equity in their home without having to make monthly payments as is required with a traditional "forward" mortgage or home equity loan. Under a reverse mortgage, funds are advanced to the borrower and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away. If the balance due upon settlement of the loan exceeds the value of the home, the FHA insurance covers the difference. HECM borrowers may draw down funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as they continue to live in the home. The FHA insurance guarantees HECM borrowers that the funds they expect to access from a reverse mortgage will be available to them, no matter what might happen to the lender from which they've obtained the loan.
HECMs are now primarily used by seniors to cover a monthly gap between income and living expenses, to pay for health care, cover home repair and maintenance costs, or to avoid foreclosures. Despite the obvious value of this financial product to America's senior population, the most frequently heard complaint among people who did not take a reverse mortgage has been that the upfront costs were high. So HUD has responded by creating a variant on the standard HECM product that substantially lowers those costs.
In a telephone briefing to prepare industry participants for upcoming changes to the HECM program, HUD Deputy Assistant Secretary Vicky Bott shared the Department's plans to implement a new variant of the product, referred to as the "HECM Saver," that will provide seniors with a reverse mortgage option that significantly lowers upfront costs by virtually eliminating the upfront Mortgage Insurance Premium that is required under the standard HECM option. Bott also reported accompanying changes intended for the existing HECM product, now referred to as a "HECM Standard." The introduction of the HECM Saver and changes to the HECM Standard are expected to be effective shortly after the new federal fiscal year begins this October.
The primary difference between the two HECM options will be in the cost of the upfront Mortgage Insurance Premium (MIP) and the amount of the funds, or "principal limit," available to borrowers. The upfront Mortgage Insurance Premium is charged by the Federal Housing Administration to support its insurance fund. Under the HECM Standard option, the upfront MIP will remain at 2% of the value of the property (or 2% of the maximum FHA loan limit of $625,500, if the property has a value greater than that.) HECM Saver will have an upfront MIP of only .01% of the property's value, significantly reducing upfront costs.
This cost saving in upfront fees is able to be achieved because the amount of money available to a borrower, an amount known as the "principal limit," under a HECM Saver will be reduced, substantially lowering the risk to the FHA insurance fund. Borrowers will receive approximately 10% to 18% less under the HECM saver option, than they would under the HECM Standard option.
These changes, Bott explained, are "enhancements to make the program sustainable."
"We applaud HUD for undertaking the analysis required and re-engineering the HECM program to create options that will make it a viable solution for more older homeowners," said Peter Bell, President of the National Reverse Mortgage Lenders Association. "The upfront mortgage insurance premium has been a deterrent to some prospective borrowers, particularly those needing less than the full amount available under the traditional HECM Standard program. This new variation, the HECM Saver, presents a sensitive response to their needs."
This new change comes about as HUD is also in the process of implementing a new, updated Counseling Protocol for prospective reverse mortgage borrowers, which takes effect on September 11, 2010. All prospective HECM borrowers are required to attend an individualized counseling session with an exam-qualified reverse mortgage counselor employed by a HUD-approved independent counseling agency prior to formally applying for a HECM reverse mortgage. Under the new Counseling Protocol, which governs what is to take place during a counseling session, the client and counselor will utilize a new Financial Interview Tool to assess whether or not the homeowner should be able to sustain themselves in their home and meet their financial obligation after obtaining the HECM. Additionally, an online tool, BenefitsCheckup.org, will be utilized to identify other sources of assistance that might help homeowners meet their needs.
"The revised counseling protocols, new HECM options and other enhanced consumer protections that are being implemented by HUD, housing counselors and reverse mortgage lenders who are members of NRMLA, should help homeowners understand that they can borrow with confidence, if they are considering a reverse mortgage," according to Bell.
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