The Federal Housing Administration (FHA) is developing a new reverse mortgage product that sharply cuts up-front payments by home owners but also significantly reduces the percentage of a home's equity that can be paid to owners under the program. Reverse mortgages insured by the government are available on homes where the youngest owner is at least 62 years old. The program is called a Home Equity Conversion Mortgage (HECM).
Many consumer advocates have been opposed to reverse mortgages, in part because they carry stiff fees to consumers. They also have been controversial because of high-pressure marketing tactics that led some borrowers to use loan proceeds for inappropriate investments. Most experts advice older consumers to use a reverse mortgage only when they need funds for living expenses and other necessities.
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Details of the new product were outlined in a press release from an industry group, the National Reverse Mortgage Lenders Association (NRMLA). It said the FHA had already approved the changes. A government spokesman, however, said the changes were not yet final. "There has been no official announcement yet because we are still working out the details," said spokesman Lemar Wooley.
In lowering one of the major sources of high reverse mortgage fees, the FHA would also limit its own losses. Even with insurance payments set at two percent of a home's value, the government has been losing money on the program. The NRMLA release said that under the new HECM loan, to be called the "HECM Saver" loan, the two percent payment will be effectively eliminated. The downside is that homeowners will be able to draw down 10 to 18 percent less money from their home's equity than under the current HECM loan rules. By paying out a smaller percentage of a home's equity, the FHA says, it will be able to sharply reduce losses on the program, and thus not need to collect thousands of dollars in up-front insurance premiums.
The new HECM Saver loan will be offered in October, the news release said. It said the current loan, to be called a "HECM Standard" loan, would continue to be available.
Under a reverse mortgage, consumers can access a percentage of their home's equity. The percent depends on their age and other variables. They use these funds to first pay off any existing mortgage on the home. They then can take the remaining money in a lump sum, spread it over monthly payments, or have a line of credit (guaranteed by the government) that they can draw down as needed. They need make no further mortgage payments and can live in the home as long as they're able. They must continue to pay any taxes and home insurance, and maintain the property.
When home owners leave the house or die, any remaining equity in the home can be passed on to their heirs. If they've carried a reverse mortgage for a long time, it's likely the lender would have earned loan payments exceeding the equity of the home. Because HECM loans are what's called "non recourse" loans, there is no financial obligation to the home owners or their heirs should loan charges exceed the value of the property.
"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," said Peter Bell, NRMLA president. "This new variation, the HECM Saver, presents a sensitive response to their needs."