Reverse mortgages have been criticized for their high fees and expensive consumer features. In managing the losses borne by the FHA, the government has instituted a number of changes to clear close to $3 billion in outstanding mortgages. The Federal Housing Administration (FHA) has unveiled sharp curbs on the Home Equity Conversion Mortgage (HECM) to affect the changes. According to the Consumer Financial Protection Bureau, their defaults in repayments stand at approximately 9 percent.
Changes to Come
With these new rules, a consumer should look at the loan terms carefully before making a step. A consumer will only access a smaller portion of their home equity when taking a reverse mortgage. A lender is also expected to set aside a significant portion of the borrower’s home equity in order to pay for future home insurance premiums and property taxes. Under the new rules, there are considerable restrictions barring citizens with lower incomes from taking HECM.
Both taxpayers and the FHA have been losing money under the HECM Standard loan, a fixed-rate mortgage loan. Under the new rules, it will be halted. This leaves the new HECM Saver as the only option for many borrowers. Even though the HECM Standard loan is comprised of higher insurance charges and other fees, it pays out to the borrower a higher percentage of the home equity than the HECM Saver, which charges no insurance cost. Since it pays out a smaller percentage of the home equity, it is more conservative, thus lowering the risk of losses, which typically leads to high insurance claims lodged by lenders in the private sector.
Under the new rules, borrowers will only withdraw specified amounts based on their indebtedness. In other words, a borrower will not take more than is required to pay off all their liens and current mortgages. There are several factors that HUD will use to determine this figure, including the borrower’s payment history. This will definitely shock those who are used to borrowing fixed-term loans, as a new formula will be unveiled for determining the amount that a borrower will qualify for.
Through the new rules, the federal government also wants to beef up financial assessment for borrowers- the ability to do impound on taxes and insurance on loans. This is obviously aimed at driving up the servicing costs, which may see the reappearance of reverse mortgage loans servicing fees.
Under the current HECM Standard loan, borrowers have the privilege of not undergoing a tight underwriting qualification procedure. But under the proposed HECM Saver program, all borrowers will have to undergo a very tight qualification process.