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Housing regulator prepares changes for reverse mortgages

The Federal Housing Administration isn't talking publicly about it, but the agency may be getting ready to lessen the up-front costs of reverse mortgages for some borrowers.

The agency also, however, may be reducing the amount seniors can borrow from their homes.

In a recent conference call with industry participants, FHA officials said they were finalizing plans to offer a home-equity conversion mortgage with almost no up-front mortgage insurance premium attached, according to the National Reverse Mortgage Lenders Association. The FHA also may tinker with the traditional product in a way that increases the overall borrowing costs.

A home-equity conversion mortgage is a federally guaranteed reverse mortgage designed to let homeowners 62 or older tap into the equity in their homes. The loans and accrued interest don't have to be repaid until the owner sells the home, dies or fails to live there for one year, but the loans have traditionally carried significant up front and annual expenses.

According to participants on the conference call, home-equity conversion mortgages would be split into two products this fall: a "standard" loan and a "saver" loan.

The saver loan would have an up-front mortgage insurance premium of 0.01 percent of a home's value, but the amount of funds that could be borrowed, known as the principal limit, would be reduced by at least 10 percent, lowering the risk to the FHA, which guarantees the loans. Because a smaller amount could be borrowed, the saver loan could be marketed as an alternative to a home equity line of credit to seniors on fixed incomes who can't make the monthly minimum interest payments required on such lines of credit.

Under the standard loan, the up-front mortgage insurance premium charged by the FHA would remain 2 percent of the property value (or a max of 2 percent of the FHA maximum loan limit of $625,500), and the principal limit would be cut by 1 to 5 percent of a home's value, depending on the borrower's age. The up-front mortgage insurance premium would remain 2 percent.

For both loans, the monthly mortgage insurance premium, which is 0.5 percent of the mortgage balance for a traditional home equity conversion mortgage, would increase to 1.25 percent.

In the past few months, several reverse mortgage lenders decreased origination fees and closing costs, partly in a bid to increase demand for the product and partly to pass along some of the profit they've made as investors scooped up the loans on the secondary market. The saver product would further reduce the up-front borrowing costs.

The National Council on Aging, which has advocated the development of a more flexible reverse mortgage product for some time, views the coming changes as welcome news that the industry is moving past the one-size-fits-all mentality.

However, the advocacy group also sees potential pitfalls.

"The more flexibility there is, the more chance there is to be talked into (something) that doesn't make sense," said Barbara Stucki, vice president of home-equity initiatives for the National Council on Aging.

In the past year, consumer advocates have voiced concerns about the marketing techniques used to tout reverse mortgages to seniors, a potentially vulnerable class of consumers.

Beginning Saturday, consumers interested in home-equity conversion mortgage will have to undergo expanded counseling to better understand their options. Stucki urges seniors to take full advantage of those expanded counseling efforts.

"Go talk to a counselor before you talk with a lender," she said. "Don't wait until you've talked with a lender and been talked into something. This counseling is something that can be an extraordinary teachable moment."

Housing regulator prepares changes for reverse mortgages 09/09/10 [Last modified: Thursday, September 9, 2010 10:11pm]
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