On Tuesday, August 29th, 2017 the Department of Housing and Urban Development (HUD), surprised the reverse mortgage industry by formally announcing new changes to the Home Equity Conversion Mortgage (HECM) program. HECM is the name for the FHA reverse mortgage program which encompasses about 95% of the reverse market. HUD cited concerns about the strength of the reverse mortgage program and taxpayer losses. These changes will take place October 2, 2017.
What is a HECM Reverse Mortgage?
A reverse mortgage is an FHA insured loan specifically designed for homeowner’s age 62 and above, that allows you to convert a portion of the value of your home into tax free money, without having to sell your home, give up title or obligate yourself to a monthly mortgage payment.
It is just a loan against your home. The lender has a lien against the title just like every other mortgage product. You are still charged interest, just like any other loan, however, you do not pay it on a monthly basis. There are no monthly payments because the interest is deferred to the end of the loan. You have the benefit of no mortgage payments, but every month, the interest that is charged is added to the loan balance, so the balance continues to grow over the life of the loan. This is truly a 100% negative amortization loan.
The loan only comes due when they last homeowner permanently leaves the home or passes away. You do have to live in the home as your primary residence, pay the property taxes and homeowners insurance as well as maintain the home, but you do that now anyway.
What Are The Changes?
- HUD is changing the Initial Mortgage Insurance Premiums (IMIP) to a flat 2.00% of the value of the home, up to maximum value of $636,150. Under
the current program, if you took out less than 60% of the amount available from the HECM, you would only be charged 0.5% of the value of the home
up to $636,150. If you had to take out more than 60%, to pay off an existing lien on the home for instance, you would then be charged 2.5%
of the value. Under the new rules the fee will be the same regardless of the initial draw amount – 2.0% of the value of the home up to $636,150.
Because the loan balance can increase, all HECM loans are required to have mortgage insurance. The mortgage insurance premium protects the lender in case the balance of the loan exceeds the value of the home. If this were to happen, the bank can never come back to you, your estate or your heirs to collect the loss. The mortgage insurance covers the loss, but the lender charges you by adding the IMIP to your closing costs and ongoing mortgage insurance to your loan balance. (see #3 below)
- HUD is also changing the amount of money available under the HECM program. The amount of money that you can receive from a reverse mortgage is
based on the age of the youngest homeowner, the value of the home and the interest rate. The changes HUD is implementing will reduce the amount
available by approximately five to ten percent. For example, if you qualify today to receive $150,000 from a reverse mortgage, you will now
get between $7,500 and $15,000 less on October 2nd .*
This could be the change that has the biggest impact on people. For example, if you qualify today to receive $150,000 and this is just enough to pay off the existing loan on your home but you wait until October 2nd to start the application, you would then only qualify to receive $135,000 - $142,500*, which would not be enough to pay off the loan balance.
- There is one positive change in that HUD is lowering the monthly mortgage insurance premium from 1.25% of the loan balance to 0.5%. You do not
pay this out of your pocket but it is added to your loan balance along with the interest on the loan.
For example, if you have a loan balance of $100,000 today, the ongoing mortgage insurance premium is 1.25%. This means that a year from now, your loan balance will be approximately $1,250.00 larger. Because you were charged this fee, but are not paying for it directly, it is added to your loan balance and will be paid when you sell the home or pass away.
If you get your reverse mortgage in place after October 2nd, this fee will only be 0.5%. With the same scenario above, under the new rules, you would only be charged $500.00 instead of $1,250.00. However, the initial mortgage insurance premium could be larger and you will qualify for less money.
Why Are These Changes Taking Place?
Without going into too much detail, the mortgage insurance premiums that are charged on reverse mortgages go into a pool and any losses are taken from that pool to pay the claims. Unfortunately, since 2009 there have been a lot of claims from the HECM reverse mortgage program.
HUD secretary Ben Carson stated the reasoning in an e-mail to an industry blog called Reverse Mortgage Daily, “Given the losses we’re seeing in the program, we have a responsibility to make changes that balance our mission with our 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.”
Mr. Carson also stated, “We’re taking needed and prudent steps to put the HECM program on a more sustainable footing so it can remain a resource for senior borrowers.&rdquo
What Should You Do Now?
The first step you should take is to do your homework and learn the facts about reverse mortgages to see if it is something that might work for your situation. Contact a local reverse mortgage specialist and get all your questions answered. If it looks like this is something that you want to move forward with, work with the reverse mortgage specialist to compare the benefits of moving forward before October 2nd to the benefits of waiting until after this time to decide which is right for you.
*These numbers are estimates only.