Reverse Mortgage Program Changes

By Daniel Duffield

Updates to the HECM Reverse Mortgage

 Considering a reverse mortgage? Changes being made to the Home Equity Conversion Mortgage (HECM), the most popular and effective reverse mortgage program, may make these loans less beneficial when considered against other alternatives.

According to Assistant Secretary for Housing Carol Galante, the Federal Housing Administration (FHA) is currently working to improve its financial sustainability after the difficulties faced by the agency following the downturn of the housing market several years ago.

Why Change the Reverse Mortgage Program?

 Galante revealed in a statement before the House Financial Services Committee on Wednesday that the estimated losses for the FHA reverse mortgage program reached $2.8 billion in 2012, necessitating some program adjustments.

As a result of this large deficit, the FHA plans to adjust the current reverse mortgage qualifications by applying some additional restrictions. Among the most significant changes to the program is that borrowers will now be limited in the amount that they will be able to secure up-front in a lump sum when cashing out the equity within their properties. Essentially, this functions as a result of the large fraction of these funds being allocated for annual property taxes and insurance premiums in the future.

These changes come in part as a result of the rising number of reverse mortgage borrowers in default. According to statistics for 2012, approximately one in 10 reverse mortgage loans are delinquent and at risk of foreclosure, largely due to borrowers spending their reverse mortgage funds prematurely and having no income to cover property taxes and homeowner’s insurance.

Approximately two-thirds of reverse mortgage borrowers opt to receive their funds in a lump sum, rather than as a line of credit, creating potential issues down the road when additional funds may be required.

To correct this program oversight, the FHA will adjust their terms such that they will both “protect FHA from losses and reduce the likelihood of borrower defaults due to nonpayment of property taxes and insurance,” Galante stated.

Additional Changes

 Other changes that may be implemented in the immediate future include:

• Incentivizing the inheritors of reverse mortgage estates to sell these properties rather than imparting them directly to the FHA.

• Providing potential borrowers with financial assessments that would determine whether a reverse mortgage would be feasible given their individual circumstances.

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