In a surprise move, the Department of Housing and Urban Development (HUD) announced new rules Tuesday for the government-backed reverse mortgage lending program that allows senior homeowners to tap the equity in their homes while they age in place.
Citing concerns about the strength of the Home Equity Conversion Mortgage (HECM) Program, the agency said it will increase initial premiums and tighten lending limits on reverse mortgages beginning Oct. 2, 2017. The changes will not affect existing reverse mortgage loan borrowers.
"Quite simply, the HECM Program is losing money and can no longer remain viable in its present form," HUD said in a fact sheet released along with the announcement. It noted that without this action, the Federal Housing Administration (FHA), which has insured more than one million reverse mortgages since the HECM program began, would require an additional appropriation from Congress to back any new loans in fiscal year 2018, which begins on Oct. 1, 2017.
"We can no longer tolerate putting American taxpayers and future generations of seniors at risk," the HUD fact sheet said.
Beginning Oct. 2, the initial mortgage insurance premiums for new HECM borrowers will increase from the current 0.5% that is available to some borrowers to 2.0% of the maximum loan amount for all borrowers. Prior to this change, homeowners who tapped less than 60% of their available equity in the first year of the reverse mortgage loan paid an up-front premium of just 0.5%. Those who borrowed more than 60% of the available loan limit during the first year of the loan paid an up-front mortgage insurance premium of 2.5%.
"The new upfront premiums recognize that all borrowers taking out a HECM, regardless of how much they draw upfront, represent potential risk and should contribute to the fiscal health of new business," the HUD fact sheet said.
In addition, HECM's annual MIP will now be 0.5% of the outstanding mortgage balance, reduced from the prior schedule of 1.25% 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," HUD said.
Finally, the new rules reduce the amount of money seniors can borrow. HUD said the new reduced borrowing limits, known as principal limits factors, "will preserve the homeowners' equity in the home if they continue to occupy the house for the expected life of the loan." As was the case with the prior schedule, principal limit factors generally rise with borrower age and decline for higher interest rates.
National Reverse Mortgage Lenders Association president Peter Bell offered a mixed review of HUD's new rules.
"On one hand, it reaffirms the Secretary and Department's commitment to sustaining FHA's reverse mortgage program for older homeowners while protecting the MMI [Mutual Mortgage Insurance Fund] and taxpayers from future draws on the Treasury," Mr. Bell said in a statement. "Bringing an element of stability to the fluctuations exhibited in recent valuations of the HECM portfolio is an important step forward for assuring the long-term viability of the program and availability of reverse mortgages to older middle-income homeowners."
On the other hand, Mr. Bell noted, "These changes diminish the amount of loan proceeds available and increase the costs increased upfront costs to most borrowers."
Mr. Bell said the trade association, which represents reverse mortgage lenders, "Believes that there are alternative options for better managing the HECM program to reduce its overall costs and will continue to advocate for such beneficial changes to the program."
Shelley Giordano, chair of the Funding Longevity Task Force, a reverse mortgage advocacy group, noted that the key element of reverse mortgages is the non-recourse feature that protects borrowers and their heirs from owing more than the house provides at sale.
"This insurance is funded by both an upfront and an ongoing FHA Mortgage Insurance Premium, but the backstop is Uncle Sam," Ms. Giordano said. "Every link in the FHA HECM reverse mortgage chain, such as investors, lenders, and borrowers, has been put on notice by HUD that, above all, the program must adhere to sound lending practices."
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Mary Beth Franklin is a contributing editor to arjuna-design and a certified financial planner.