Refi Boom for Reverse Mortgages?

Reverse mortgage lenders are expecting a refinancing boom now that the Department of Housing and Urban Development has finally issued a rule that reduces the costs of refinancing a federally insured reverse mortgage.

"We are very pleased that HUD has issued this rule while rates are still down," said Jim Mahoney, chief executive of Financial Freedom, the largest originator and servicer of reverse mortgages based in Irvine, Calif.

Mr. Mahoney expects the new rule, which goes into effect April 26, will spark a refinancing boom. He noted that housing values have been increasing over the past few years and interest rates are still at record lows, which allows seniors to tap more equity in their homes.

"It is an opportune time for seniors to refinance and obtain much-needed tax-free retirement income," he said. Mr. Mahoney is co-chair of the National Reverse Mortgage Lenders Association.

Federal Housing Administration reverse mortgages are called home equity conversion mortgages (HECMs). And the new rule gives seniors credit for the upfront insurance premiums they paid on their HECM loan when they refinance. So seniors only have to pay a 2% upfront premium on the difference between the original loan balance and the new loan balance.

If a senior has a $150,000 HECM loan, the upfront cost of refinancing into a $200,000 loan is reduced from $4,000 to $1,000 under the new rule.

In 2000, Congress passed a bill that directed HUD to change its refinancing policy and seniors have been waiting for HUD to issue this rule, Mr. Mahoney said. "We think there is significant pent-up demand" to refinance.

The interim rule also caps origination fees on HECMs at 2% - based on the value of the home or the FHA loan limit, whichever is less. The 2% cap includes mortgage broker fees.

While the effective date of the rule is April 26, reverse mortgage lenders are hoping to get a ruling from HUD so they start taking applications before the effective date. The comment period on the interim rule ends May 24.

In other news, HUD has issued an interim final rule to jump-start its new downpayment assistance program.

Last year, Congress approved an initiative by President George Bush called the American Dream Downpayment program, which provides up to $6,000 in downpayment assistance to low-income families who are purchasing their first home.

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