Seniors who want to tap their home equity through a reverse mortgagemight want to keep a close watch on the Federal Housing Administration (FHA).
The Home Equity Conversion Mortgage (HECM) program, a reverse mortgage backed by the FHA, is showing signs of substantial stress, and U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan has a plan to relieve the pressure.
HUD proposes ‘blunt changes’
Donovan outlined his proposals in prepared testimony to the U.S. Senate Banking Committee last week. While most of his discourse concerned the FHA mortgage insurance fund, he also outlined “blunt changes” he wants to make to protect the FHA from losses in the HECM program.
Short-term changes
In the near term, Donovan said the FHA plans to consolidate its two HECM options–the Fixed Rate Standard program and Fixed Rate HECM Saver product–and adjust the factors that are used to determine the maximum amount a senior can borrow. These changes likely would result in smaller maximum loan amounts across the board.
Long-term changes
Longer term, other changes would require federal legislation or a lengthy rule-making process. These proposals include:
- Limiting the senior’s draw when the mortgage is originated to mandatory obligations, such as closing costs, existing mortgage debt and federal loans
- Performing a financial assessment of the borrower as a basis for loan approval and to determine the suitability of various HECM products for that person
- Establishing a tax and insurance set-aside to ensure sufficient equity or an annuity is available to pay taxes and insurance on the mortgaged property
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