“We’re taking needed and prudent steps to put the HECM program on a more sustainable footing so that it can remain a resource for senior borrowers, “ said HUD Secretary Ben Carson as tweeted by FHA.gov.
The Housing and Urban Development announced on August 29, improvements to its reverse mortgage program known as the Home Equity Conversion Mortgage (HECM), including a cut in the annual mortgage insurance premiums.
In an accompanying factsheet, the Federal Housing Administration, which backs the government’s reverse mortgages, noted that these changes to the HECM program are made to “improve its financial health and ensure it remains a resource for senior borrowers.”
The agency reasoned that holders of traditional forward mortgages — usually lower-income, younger homeowners – have to bail out the HECM program through their mortgage insurance premiums.
This has placed a significant burden on the agency’s Mutual Mortgage Insurance Fund which has incurred $11.7 billion in net cost since 2009 due to reverse mortgages, according to the FHA.
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Key Changes to HECMs
To keep the program viable, the FHA has made changes in the following areas:
- Mortgage Insurance Premiums (MIPs)
- Principal Limit
HECM Servicing Policy Changes
The FHA has handed down additional guidance to the Final Rule codified in January this year.
These implementing policy changes set forth in this mortgagee letter will apply to reverse mortgages on or after 19 September 2017.
The Final Rule, together with the additional guidance, will address these issues:
- When a borrower defaults on his/her loan because of unpaid property charges.
- When a property securing a HECM that is due and payable is to be sold by either the borrower, eligible non-borrowing spouse, or the borrower’s heir.
- When the HUD reimburses up to $3,000 as incentives to lenders for cutting back time in conveying eligible properties to the FHA.
Lower Annual MIPs
Starting October 2, 2017, senior borrowers will pay lower annual insurance premiums and higher initial premiums to balance things out.
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- The FHA has changed the annual MIP from 1.25% to 0.5% for all borrowers. “This change provides fee relief for all borrowers in the program, and preserves more equity for borrowers over time by slowing the rate at which the loan balance grows,” the agency said in another guidance.
- The FHA has changed the upfront or initial MIP from 2.5% to 2% for many borrowers. This 2% will be a standard, regardless of how much a new HECM borrower draws upfront.
Adjusted Loan Limits
The FHA has adjusted how much a senior borrower can draw, or the HECM’s Principal Limit Factors (PLFs).
Beginning October 2, 2017, the PLFs will be lower than previous levels as presented in this updated schedule.
For the average borrower, this means being able to borrow 58% of one’s home equity compared with 64% previously as noted by HousingWire.
In keeping with the program’s practice, the PLFs rise with age and decrease as interest rates go up.
Old vs New HECM Borrowers
The changes rolled out in August will not affect existing borrowers of HECMs, the FHA emphasized. It is senior homeowners taking out FHA-backed reverse mortgages in September/October who will feel the impact of these changes.
With barely a month for some of these changes to become effective, Reverse Mortgage Daily reported that lenders are bracing for a rush of homeowners who want to take advantage of higher loan limits, among other things.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.