On September 3, 2013, the U.S. Department of Housing and Urban Development announced major changes to the Home Equity Conversion Mortgage (HECM) program that include:
- Restricting the amount of funds that can be disbursed at closing or during the initial 12 months after closing;
- Adopting a Single Disbursement Lump Sum Option
- Instituting a new upfront mortgage insurance premium structure
- Eliminating HECM Standard and Saver
- Changing the Principal Limit Factor (PLF) tables that determine how much money you are eligible for
- Requiring every prospective borrower to undergo a financial assessment
- Establishing set aside accounts to pay mandatory property charges, such as property taxes and homeowners insurance, for borrowers who pose a future risk of defaulting on their reverse mortgages.
HUD called for these changes because, since the 2009 housing crisis, the HECM program has experienced major demographic and behavioral shifts that have increased the risk of losses to the program. In announcing the changes, HUD said, “these critical program changes will realign the HECM program with its original intent, and thereby aid in the restoration of the Mutual Mortgage Insurance Fund and help ensure the continued availability of this important program.”
Most of the changes became effective September 30, 2013, except for the financial assessment and establishment of set-aside accounts, which will become effective sometime in 2014 after HUD publishes procedures that companies will need to follow.
Following is a more detailed summary of these changes:
Initial Draw Limitations
HUD discovered that loans where all, or a substantial portion, of the available funds are disbursed at closing have a higher tendency to end in default. The reforms announced by HUD will help ensure that consumers can financially sustain themselves for longer periods of time in retirement.
There is now a limit on the amount of money that can be withdrawn in the first year. If you are eligible to withdraw $100,000, for example, the maximum you can take at closing is $60,000, or 60 percent, in the first year. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, exceed the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.
Single Disbursement Lump Sum Option
Historically, HECM borrowers had to take all of the loan proceeds available to them.
HUD created a HECM “mini” option that allows you to take less money at closing. If you are eligible for a $100,000 loan, for example, but don't want that much money, you can choose a single disbursement equal to 60 percent or less of that sum.
This is a great option for someone who wants to preserve the equity in his home by utilizing a smaller amount of funds. Unfortunately, if you want more money at a later time you cannot access additional funds, unless you refinance into a new reverse mortgage, but then you may pay similar closing costs all over again.
Changes to MIP and PLF
One of the upfront fees that you must pay is mortgage insurance, which is paid directly to the Federal Housing Administration. The fee is based on the amount of funds withdrawn during the initial year.
As long as you don’t take more than 60 percent of the available funds in the first year, you will be charged an upfront MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the upfront MIP will be 2.50 percent.
On a $200,000 home, 2.5 percent is $5,000 versus $1,000 if you were paying 0.50 percent. (Previously, the upfront fees were 2 percent for "Standard" loans and 0.01 percent for "Saver" loans.
The Annual MIP remains at 1.25 percent of the outstanding loan balance.
Financial Assessment (Coming in 2014)
HUD is concerned by the number of borrowers who have fallen into technical default because they no longer have the financial means to continue paying property taxes, homeowners insurance and other property charges. To help reduce future defaults, HUD is finalizing guidelines that lenders must follow when conducting a financial assessment of prospective borrowers.
Lenders will analyze all income sources -- including pensions, Social Security, IRAs and 401(k) plans -- as well as your credit history. They will look closely at how much money is left over after paying typical living expenses. If a lender determines that you have sufficient income left over, then you won't have to worry about having any funds set-aside to pay for future tax and insurance payments.
Set-Asides (Coming in 2014)
If, however, a lender determines that you may not be able to keep up with property taxes and hazard insurance payments, they will be authorized to set-aside a certain amount of funds from your loan to pay future charges. The amount of the set-aside will be based on the life expectancy of the youngest borrower. If set-aside funds run out, you must continue paying property charges using whatever funds are at your disposal.
Even if you don't need a set-aside, you can still elect to have one established voluntarily. The lender can pay your property charges either from a line of credit or by withholding monthly disbursements.
If you have questions about any of these changes, you can contact a lender in your area or submit a question to NRMLA and we’ll try to answer it as best we can.