Just last week, the U.S. Department of Housing and Urban Development (HUD) published new guidance intended to help with the risks associated with the Federal Housing Administration’s (FHA) reverse mortgage program, which is also known as the Home Equity Conversion Mortgage Program (HECM). In addition to providing reverse mortgages through the FHA, HUD has been helping with housing market recovery by providing housing counseling grants to organizations across the country.
In early August, we told you about the problems the FHA has been experiencing with the HECM program. In particular, we explained that the FHA has been making plans to crack down on its rules for reverse mortgages. Many senior citizens across the country have been using reverse mortgages as a way of avoiding foreclosure, and HUD wasn’t prepared for this problem. The new guidance from HUD is intended to “strengthen and protect FHA’s Mutual Mortgage Insurance Fund (MMI),” according to a HUD press release.
What is FHA’s Mutual Mortgage Insurance Fund?
In short, the MMI is a fund that provides insurance for mortgages made by the FHA for single-family homes. When purchasing a home with a mortgage through the FHA, the borrower pays into the MMI. And in the event that the borrower defaults, the MMI pays the lender.
And just as a reminder, reverse mortgages typically are geared toward senior citizens who “have equity in their homes and want to supplement their income.” According to HUD, the only reverse mortgages for seniors that are insured by the federal government are those through the HECM program. They’re only available through an FHA-approved lender, and order to be eligible, senior citizens must meet certain borrower, property, and financial requirements.
How Will the New Guidelines Help?
According to Federal Housing Commissioner Carol Galante, the recent changes “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.” In other words, the new guidelines will make some changes to the HECM program so that the reverse mortgage option can remain in place for seniors. Galante explained that the FHA hopes the guidelines will make sure that the HECM program “is a financially sustainable option for seniors” that can provide them with extra money to live comfortably in their homes through old age.
The HUD press release reminds us that in recent years, the demographics of those participating in the HECM program shifted to include riskier borrowers who in turn “added significant risks to the MMI fund.” In particular, the HECM program began to see borrowers shifting from adjustable rate mortgages with access to a credit line to fixed rate mortgages where the borrower takes all available funds at once.
In response to the FHA’s annual report to Congress on the status of the MMI fund, Congress passed the Reverse Mortgage Stabilization Act of 2013. This new law authorizes the HUD Secretary to make changes to HECM if they’re “necessary to improve the fiscal safety and soundness of the program.”
In addition, FHA-approved lenders will also receive a new guide assessing financial risk when it comes to reverse mortgages. According to HUD, the guide will help lender to implement certain risk management reforms, including:
· Changing mortgage insurance premiums and principal limit factors
· Restricting the among of money that seniors can borrow at the closing of a reverse mortgage
· Requiring a financial assessment for HECM borrowers
· Requiring borrowers to set aside some of the loan proceeds at the closing in order to pay property taxes and insurance
If you’re a senior who is concerned about avoiding foreclosure, or if you have questions about financial stability and the reverse mortgage process, contact the experienced attorneys at the Emerson Law Firm today.
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