The Department of Housing and Urban Development (HUD) has announced its intentions to change the requirements for its reverse mortgage program — specifically, to raise premiums and tighten up the limits on loans.
But such a change could have tremendous ramifications for senior citizens, and there’s not much time to plan; the proposed revisions to the plan will go into effect on October 2.
Implications for the HECM Program
The Home Equity Conversion Mortgage program (HECM) has always been considered a bit high-risk, in spite of past improvements. It’s one of the most unstable parts of the Mutual Mortgage Insurance Fund, which is the flagship fund of the Federal Housing Administration.
In spite of its risk, the HECM has been of great benefit to many seniors age 62 and older who still live in their home. Under the program, these seniors could withdraw some of the equity in their home, implementing a reverse mortgage that provided income for them through a lump sum, regular payments, or a line of credit. These loans didn’t have to be paid off until the borrower died, moved, or sold the house.
The new changes are being implemented by the Trump administration in hopes that the program will move to more solid financial footing.
Here’s a closer look at the changes and what they could mean for the senior citizens who take advantage of the HECM program:
- New borrowers will pay 2% of the home’s value up front, followed by 0.5% each year over the life of the loan. This is meant to reduce the risk to taxpayers if the borrower lives longer than expected.
- Current borrowers who borrow more than 60% of the allowable amount in the first year would pay 2.5% up front, so they may see a small reduction in premiums.
- Most seniors will see a decrease in the amount of money they can borrow, from the current 64% down to about 58% of the home value.
The changes will only affect new borrowers; current borrowers will maintain their current rates.
The Purpose of the Changes
As I said before, the overall hope is to help the HECM program get on better ground. More specifically, it’s intended to help seniors not miss their property tax and insurance payments, and to help them not default on their reverse mortgages.
On August 29, the FHA tweeted a statement from HUD secretary Ben Carson about the proposed changes:
“Given the losses we’re seeing in the HECM 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. We’re taking needed and prudent steps to put the HECM program on a more sustainable footing so that it can remain a resource for senior borrowers.”
Rick Sexton, loan officer at McGowin-King Mortgage – Office Park in Birmingham, Alabama, commented on the changes as well.
“There is still time to take advantage of the existing broader benefits of the Reverse Mortgage program,” Sexton said. “Senior homeowners may seek out a licensed, approved FHA mortgage lender, now, and with no obligation, have them submit a non-binding, preliminary application, with required counseling, to FHA to obtain a “Case Number” for your property, and thus being “grandfathered” under the existing rules, and close after Oct 2. However, regardless of when, and in spite of “false myths,” a properly engineered Reverse Loan is still a VERY beneficial financial planning tool for most seniors.”
Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC and WELCH INVESTMENTS, LLC, which specialize in providing fee-only investment management and financial advice to families throughout the United States. He is the co-author of 100 Tips for Creating a Champagne Retirement on a Shoestring Budget; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning (John Wiley & Sons, Inc.) and THINK Like a Self-Made Millionaire. Visit his Web Site www.welchgroup.com. Consult your financial advisor before acting on comments in this article.