The Department of Housing and Urban Development has redesigned its reverse mortgage program to reduce losses and ensure seniors keep some of their home equity in reserve.
The Federal Housing Administration will no longer require seniors to tap all their equity at once when they take out a Home Equity Conversion Mortgage.
FHA is also limiting the initial draw HECM borrowers can take at closing and during the next 12 months.
These changes are in alignment with legislative reforms passed by Congress to stem losses in the
“Our goal here is to make certain our reverse mortgage program is a financially sustainable option for seniors that will allow them to age in place in their own homes,” said FHA commissioner Carol Galante.
Starting Sept. 30, seniors will be able to tap just 60% of the proceeds allowable under a HECM loan at closing, according to a mortgagee letter FHA issued last week.
If the borrower’s obligations to pay off the existing mortgage and lines total 60% of the proceeds, the new rules allow for an additional 10% distribution.
These changes put an end to the Standard fixed-rate HECM product that was so popular with lenders and Ginnie Mae issuers. This Standard HECM required borrowers to take all their allowable proceeds from the reverse mortgage in a single lump sum at closing. The high premiums securitizers paid for the Standard fixed-rate product allowed lenders to cover some of the upfront costs for borrowers.
But hard times following the financial crisis and problems managing such large sums resulted in too many seniors going into technical default when they couldn’t afford to pay their property taxes and insurance.
This led to mounting losses for the FHA mortgage insurance fund until HUD moth-balled the Standard fixed-rate product in April.
Under the new rules authorized by Congress, there will no longer be HECM Standard or Saver products.
HUD has consolidated the two products and going forward seniors will choose between a HECM fixed-rate loan and a HECM variable-rate loan.
HUD also structured the upfront premiums to encourage borrowers to take out 60% or less of the proceeds at closing or during the first 12 months. Those borrowers will pay a 0.5% upfront insurance premium. Borrowers taking out more than 60% will pay a 2.5% upfront premium.
National Reverse Mortgage Lenders Association president Peter Bell pointed out that FHA is offering a new “mini” HECM option that also encourages borrowers to take out less than 60% of their reverse mortgage proceeds.
“The whole idea is to encourage the behavior where seniors take their money out more slowly,” Bell said. “We know that the program performs better when people draw the funds down slowly over a longer duration of time than when they draw it all upfront,” he added.
If the senior chooses a fixed-rate mini-HECM, the initial draw will be all they get. To tap additional equity, they will have to refinance. If the borrower chooses a variable-rate HECM, they can take an initial draw at closing and draw the rest of their line of credit after the first 12 months.
The NRMLA president said the newly designed HECM program is consistent with the way HUD presented its reform proposals to Congress and the industry.
“The legislation gave them the authority to do it,” Bell said. And “it’s completely consistent with what has been discussed over the past year,” he added.
The legislation also requires FHA to conduct financial assessments of HECM borrowers to ensure they have the residual income to benefit from a reverse mortgage. That new requirement will go into effect Jan. 13, 2014.
Applicants that don’t pass the financial assessment might be able to get a HECM if they set up a “Lifetime Expectancy Set-Aside” reserve to cover property taxes and assessments as well as homeowners and flood insurance.
