Big Changes to Reverse Mortgage Program – Reduced Loan Amounts and Higher Fees
In an effort to further strengthen the long-term viability of the Home Equity Conversion Mortgage (also known as the HECM Reverse Mortgage), the Department of Housing and Urban Development (HUD) announced plans this week that will ultimately make these loans more expensive for some consumers, and more importantly, reduce the amount homeowners can borrow, which in turn limits who can qualify for these much needed loans in retirement.
So, what is going to change?
Higher Closing Costs for Some, Lower Ongoing Costs for All:
Reverse Mortgage Insurance Premiums Will Be Flat Rates
Mortgage insurance premiums (MIPs) on the HECM reverse mortgage will be set to 2% of the maximum claim amount at the time of origination for all new mortgages, then 0.5% of the loan balance annually during the life of the loan. This is both good and bad news.
A MIP is a fee paid on almost all mortgages. It is a closing and servicing cost used as insurance to protect the lender from any losses they might experience if the loan goes into default.
Under the current HECM reverse mortgage program, you pay on closing:
- 0.5% of the maximum claim amount if you take less than 60% of your available loan proceeds as cash or to pay off an existing mortgage, OR
- 2.5% of the maximum claim amount if you take out more than 60% of available money.
After closing, servicing MIP is 1.25% of the loan balance annually.
So, in some cases the MIP closing costs will be lower, in other cases they will be higher, but for everyone the ongoing servicing costs will be reduced.
Less Money Available to All HECM Reverse Mortgage Borrowers:
Lending Limits Will Be Lowered
A far bigger, more significant change is that the total amount of money you can borrow with a reverse mortgage is being lowered. Not only does this limit how much cash can be accessed, homeowners with larger mortgage balances may not qualify for the loans any more since you need to be able to payoff all existing mortgages when getting a reverse mortgage.
Today, the average a homeowner can borrow based on age and the current interest rate is about 64% of the home’s value.
After Oct. 2017, the average borrowing power will drop to 58% of your home’s value. So let’s say your home is worth $300,000.
- If you were to get your loan today, you could access $192,000 (64% of the $300,000).
- If you were to get your loan after Oct. 2, 2017, then you could only access $174,000 (58% of the $300,000)
Why Are These Changes Taking Place?
HUD says that they are concerned about the strength of the program and potential losses to taxpayers.
The HECM reverse mortgage is a “non-recourse” loan, meaning the borrower is not responsible for any mortgage amount that exceeds the value of the house. In the event the mortgage exceeds the value of the house, the borrower can turn over the house if they want. HUD and its FHA office back up this guarantee by re-insuring private lenders who originate reverse mortgage loans. This is covered by the MIP fees referenced above paid by all borrowers.
If a reverse mortgage loan reaches 98% of the appraised value of the home, then the lender can “assign” the loan to FHA who then uses the insurance fund to guarantee any losses suffered by the lender. HUD is concerned that the FHA insurance fund is incurring too much risk with its insurance fund, which has forced these program changes.
HUD Secretary, Ben Carson, said in a statement to Reverse Mortgage Daily, an industry blog, “Given the losses we’re seeing in the program, we have a responsibility to protect taxpayers. Fairness dictates that future HECM loans do not adversely impact the overall health of FHA’s insurance fund, which supports the financing needs of younger, mostly first-time homeowners with traditional FHA mortgages.”
In a fact sheet on the program, HUD says: “We can no longer tolerate putting American taxpayers and future generations of seniors at risk. Quite simply, the HECM program is losing money and can no longer remain viable in its present form.”
Are These Changes Good or Bad for Seniors?
Reverse mortgages allow homeowners age 62 and older to convert a portion of their home equity into tax-free loan proceeds, which they can elect to receive either in a single lump sum payment, monthly installments, or through a line of credit that allows funds to be withdrawn as needed. Money can be used in any way the homeowner desires.
For seniors who want to remain in their home and access their home equity, reverse mortgages will always be a useful financial strategy. And, therefore, it is important to support efforts — like these — to keep the program healthy and viable.
However, in the short term, it does mean that seniors who initiate a loan after Oct. 2, 2017 will be able to access less money.