New Restrictions on Reverse Mortgages Aimed at Sustainability

New guidance effecting the FederalrnHousing Administration’s (FHA’s) Home Equity Conversion Mortgage (HECM)rnprogram, often referred to as reverse mortgages, was announced in a letter tornmortgagees on Tuesday.    FHA hadrnannounced that changes to the program, designed to allow older citizens tornaccess the equity while remaining in their homes, would be forthcoming becausernof the high costs of the program and in line with FHA’s goal of reforming andrnprotecting its Mutual Mortgage Insurance (MMI) Fund.   </p

The agency said that its HECM portfoliornhad experienced major changes in demographics and borrower preferences inrnrecent years.  Borrowers had originallyrntended to select adjustable rate mortgages associated with lines of creditrnwhich they could draw down over time.  Then borrowers shifted to fixed rate mortgagesrnwith all available equity drawn out at closing.   Falling home prices and use of the programrnby younger borrowers with higher debt levels also contributed to risk. </p

Changes to the program announced todayrninclude: </p<ul class="unIndentedList"<liChanges to initial mortgagerninsurance premiums and principal limit factors; </li<liRestrictions on the amount of fundsrnsenior borrowers may draw down at closing and during the first twelve monthsrnfollowing closing; </li<liRequiring a financial assessment forrnall HECM borrowers to ensure that they have the capacity and willingness tornmeet their financial obligations and the terms of the reverse mortgage; and </li<liRequiring borrowers to set aside arnportion of the loan proceeds at closing (or withhold a portion of monthly loanrndisbursements) for the payment of property taxes and insurance based on thernresults of the Financial Assessment.</li</ul

The letter, signed by FHArnCommissioner Carol Galante, and a FinancialrnAssessment and Property Charge Guide released at the same time, providernparameters for the financial assessment referenced above.  The Guide sets out specific requirements that the mortgagee must usernin performing credit history and cash flow/residual income analysis,rndocumenting and verifying credit, income and property charges as well asrnvaluing extenuating circumstances and compensating factors.  The Guide</ialso sets out parameters for determining if funding sources for property chargesrnfrom loan proceeds can be required and evaluating the results of the financialrnassessment in determining HECM eligibility. The guidance is effectivernfor loans assigned an FHA case number on or after January 13, 2014. </p