While reverse mortgages have become a bigger part of the senior population’s financial picture, the nation’s most popular program has undergone a mandatory change that will reduce the total proceeds available to FHA-insured reverse mortgage borrowers.
The move is in response to a projected $798 million shortfall in the Federal Housing Administration’s budget for the Home Equity Conversion Mortgage in fiscal 2010. The fiscal year for the U.S. Department of Housing and Urban Development, the agency that oversees FHA, began Oct. 1.
FHA is now shouldering a greater portion of the residential loan load and its insurance component has come under greater scrutiny because of it.
In a letter to all reverse mortgage lenders dated Sept. 23, 2009, David H. Stevens, HUD’s new assistant secretary for housing and federal housing commissioner, said changes in the agency’s popular Home Equity Conversion Mortgage program were necessary "to assist with the viability of the program."
A reverse mortgage enables senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free. But the instruments are complex and may not be a good fit for all seniors.
"In a nutshell, the commissioner explained that from its enactment, the HECM program was intended to operate without any credit subsidy," said Peter Bell, president of the National Reverse Mortgage Lenders Association, a nonprofit trade group based in Washington, D.C.
"Since the congressional appropriations process is unlikely to provide credit subsidy, program changes are the only viable route for keeping the program operating past Sept. 30."
The result is a 10 percent reduction in what HUD labels as the "principal limit factor" on all reverse mortgages applied for on or after Oct. 1, 2009. This factor reduces available proceeds to reverse mortgage borrowers.
Here are two examples of the new HECM maximum amounts with the principal limit factor:
71-year-old borrower in a $370,000 home with a HECM fixed-rate loan at 5.56 percent
Total cash available (after closing costs and set-asides):
- Through Sept. 30, 2009: $240,436.31
- On or after Oct. 1, 2009: $211,511.85 …CONTINUED
82-year-old borrower in a $370,000 home with an HECM fixed-rate loan at 5.56 percent
Total cash available (after closing costs and set-asides):
- Through Sept. 30, 2009: $273,908.73
- On or after Oct. 1, 2009: $241,230.75
"While the result will be an increased number of borrowers who are short funds to pay off existing liens or mortgages, it is important for the industry to keep in mind the fact that this reduction is the equivalent to less than a 1 percent increase in interest rates," said Sarah Hulbert, chief executive officer of Senior Financial Corp., a reverse mortgage lender. "We were at that level less than a year ago."
More than 450,000 HECMs have been made since 1989, the year FHA launched its reverse-mortgage pilot program. FHA insured approximately 112,000 HECMs in fiscal 2008, up from 107,367 HECMs in 2007 and 43,131 in 2005.
While most reverse mortgages typically have been used by older homeowners to help them "age in place," the loans also now enable seniors to purchase a home. The HECM for purchase program allows owners over 62 years of age to make a large downpayment on a new home and then utilize the reverse mortgage as permanent financing.
For example, if a 70-year-old homebuyer wanted to purchase a $300,000 home, he or she could put approximately $123,000 down and finance the balance of $177,000, plus closing costs, with a reverse mortgage. The buyer would make no monthly payments for as long as he or she maintained the home as a principal residence.
Maximum loan fees on reverse mortgages are 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.
The reverse mortgage loan amount is based on the home value, the age of the homeowner(s), and the current interest rate. Reverse mortgages require that all prior loans and liens must be paid off so that the reverse mortgage loan is in "first place" or in first-lien position. Many times, the proceeds from the reverse mortgage can pay off the underlying loans. A senior does not have to own the home "free and clear" to obtain a reverse mortgage.
Tom Kelly’s book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on www.tomkelly.com.
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