New guidance effecting the Federal Housing Administration's (FHA's) Home Equity Conversion Mortgage (HECM) program, often referred to as reverse mortgages, was announced in a letter to mortgagees on Tuesday. FHA had announced that changes to the program, designed to allow older citizens to access the equity while remaining in their homes, would be forthcoming because of the high costs of the program and in line with FHA's goal of reforming and protecting its Mutual Mortgage Insurance (MMI) Fund.
The agency said that its HECM portfolio had experienced major changes in demographics and borrower preferences in recent years. Borrowers had originally tended to select adjustable rate mortgages associated with lines of credit which they could draw down over time. Then borrowers shifted to fixed rate mortgages with all available equity drawn out at closing. Falling home prices and use of the program by younger borrowers with higher debt levels also contributed to risk.
Changes to the program announced today include:
- Changes to initial mortgage insurance premiums and principal limit factors;
- Restrictions on the amount of funds senior borrowers may draw down at closing and during the first twelve months following closing;
- Requiring a financial assessment for all HECM borrowers to ensure that they have the capacity and willingness to meet their financial obligations and the terms of the reverse mortgage; and
- Requiring borrowers to set aside a portion of the loan proceeds at closing (or withhold a portion of monthly loan disbursements) for the payment of property taxes and insurance based on the results of the Financial Assessment.
The letter, signed by FHA Commissioner Carol Galante, and a Financial Assessment and Property Charge Guide released at the same time, provide parameters for the financial assessment referenced above. The Guide sets out specific requirements that the mortgagee must use in performing credit history and cash flow/residual income analysis, documenting and verifying credit, income and property charges as well as valuing extenuating circumstances and compensating factors. The Guide also sets out parameters for determining if funding sources for property charges from loan proceeds can be required and evaluating the results of the financial assessment in determining HECM eligibility. The guidance is effective for loans assigned an FHA case number on or after January 13, 2014.
In announcing the revisions Galante said, "The changes being announced today will realign the HECM program with its original intent which will aid in the restoration of the MMI fund and help ensure the continued availability of this important program. Our goal here is to make certain our reverse mortgage program is a financially sustainable option for seniors that will allow them to age in place in their own homes."
