The Federal Housing Administration recently announced a cycle of new changes to its reverse mortgage program and most have already taken effect. The changes were made in response to the losses suffered by the FHA in connection with the home equity conversion mortgage (HECM) program.
The bottom line is that under these new rules, borrowers of a given age and a given amount of equity in their home cannot borrow as much in total as they could before. Will this bring senior sellers into the market because they can’t afford to hold onto their homes?
The home equity conversion mortgage program was initially set up to help senior homeowners remain in their homes and not be used to meet short-term financial needs. A significant amount of borrowers were drawing as much cash upfront usually reaching 100 percent of the principal limit. Borrowers who cashed out early have less motivation to stay prevalent on their current property taxes and insurance.
Several years ago, the FHA created a savers program offering a substantial reduction in the upfront mortgage insurance program for those willing to accept a smaller principal limit. The smaller upfront charges and lower draws resulted in slower growth of future debt on saver HECMs. The saver program never attracted many seniors as the appeal of cash-in-hand outweighed the prospect of slower debt growth.
According to the new rules borrowers can no longer draw 100 percent of the principal limit unless the draws are used to comply with FHA mandates. For a borrower to be able to draw from equity there are obligatory rules that need to be met, paying off all existing liens and settlement costs as well as repairs to the property needed to meet FHA property requirements.
When cash is drawn within the first year for other than mandated purposes it is often referred to as “pocket draws” which is limited to 10 percent of the principal limit. Borrowers selecting fixed-rate HECMs had the ability to draw 100 percent of their principle limit upfront resulting in many seniors choosing a fixed-rate HECMs. Under the new rules which limit pocket draws, only seniors with large existing mortgage balances are likely to opt for a fixed-rate HECM. On adjustable-rate HECMs, a borrower is now subject to the new limits on cash draws at closing, but after a year can draw the remainder of their principal limits.
It is still not clear if the changes will succeed in discouraging early cash draws but the HECM program is even more complicated than ever and these rule changes have made it more difficult for seniors to sort out their cash draw and options for mortgage insurance.
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