Last month, FHA
announced a series of sweeping changes in the HECM reverse
mortgage program, most of which have already taken effect.
The changes are a response to increasing losses suffered by
FHA in connection with the extensive misuse of the program.
A disproportionate number of borrowers were drawing as much
cash upfront as they could – 100% of the principle limit
(PL), which is what FHA calls the senior’s total borrowing
power. This left them no scope for further draws in the
future.
The HECM program
was originally intended to help senior homeowners remain in
their homes indefinitely, not to meet short-run financial
needs. Borrowers who cashed out early, furthermore, had less
incentive to stay current on their property taxes and
insurance, which increased losses to FHA.
The Saver Program to
Discourage Cash Draws Was Unsuccessful:
Several years ago, FHA had tried to
encourage seniors to take a longer view by creating the
saver program as an alternative to the standard program. The
saver program offered a sharp reduction in the upfront
mortgage insurance program to seniors willing to accept a
smaller PL. The combination of reduced upfront charges and
smaller draws resulted in slower growth of future debt on
saver HECMs. But the prospect of slower debt growth proved
no match for the appeal of cash-in-hand, and the saver
program never attracted many seniors.
The Saver Program
Has Been Terminated and Upfront Draws Are Now Limited by
Rule: Under the new rules,
borrowers can no longer draw 100% of the PL unless the draws
are used to comply with FHA mandates. Mandatory draws
include paying off all liens on the property including the
senior’s existing mortgage if there is one, all settlement
costs, and any repairs needed to meet FHA property
requirements. Cash draws within the first year for other
than mandated purposes (I call these “pocket draws”) are
limited to 60% of the PL less mandatory draws, or to 10% of
the PL, whichever is greater. The dual mortgage insurance
premium feature has been retained, but now it is based on
whether or not total cash draws in the first year are above
or below 60% of the PL.
Fixed-Rate HECMs Are
Less Attractive: It has always
been the case that borrowers selecting fixed-rate HECMs had
to draw cash at closing, they could not defer cash draws.
This did not discourage use of fixed-rate HECMs so long as
borrowers could draw 100% of their PL upfront, and virtually
all those who drew maximum cash used fixed-rate HECMs.
However, under the new rules limiting pocket draws, the only
seniors likely to opt for a fixed-rate HECM are those with
large existing mortgage balances. The total of mortgage loan
balances, other mandated draws and pocket draws up to 10%
can be 100% of PL.
Will Large Cash Draws Continue on ARMs? On adjustable-rate HECMs, a borrower is now subject to the new limits on cash draws at closing, but after a year they can draw the remainder of their PL. FHA seems to be assuming that the most cash-hungry borrowers will be deterred by having to go with an adjustable rate, and/or having to wait a year for a second helping. I have my doubt s about that. If the only change is to shift a chunk of the cash withdrawals forward a year, expect FHA to come back in a few years with more draconian restrictions.
Bad News, The Principal Limits Are Now
Lower Than They Were: Under the
new rules, borrowers of a given age and a given amount of
equity in their home cannot borrow as much in total as they
could. Given the limitations on upfront draws, this may or
may not prove necessary to protect FHA’s solvency, but they
can always reverse it.
More Bad News, the
HECM Program Is Now Even More Complicated Than it Was:
While it is not clear whether or
not the new rules will succeed in discouraging early cash
draws, it is very clear that these rules have made it more
difficult for seniors to sort out their cash draw and
mortgage insurance (MI) options. Here are some
illustrations:
*If mandatory draws are 10% of the PL, pocket draws can be
up to 50%, MI is 0.5%.
*If mandatory draws are 50% of the PL, pocket draws can be
up to 10%, MI is 0.5%.
*If mandatory draws are 55% of the PL, pocket draws can be up to 5% with MI of 0.5%, or up to 10% with 2.5% MI. The borrower has a choice.
*If mandatory draws are 61% of the PL,
pocket draws can be up to 10%, MI is 2.5%.
If this makes your
head spin, never mind, I had to master it in order to
reprogram the HECM calculator, but you don’t, and neither do
seniors contemplating a HECM. What should matter to them is
what their unique options are, and they can find that by
clicking
HERE.
