By Jack Guttentag
(MCT)—Last month, the Federal Housing Administration announced a series of sweeping changes in its reverse mortgage program, most of which have already taken effect. The changes are a response to increasing losses suffered by the 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 percent of the principal limit, which is what the FHA calls the senior’s total borrowing power. This left them no scope for further draws in the future.
The home equity conversion mortgage, or 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 the FHA.
Several years ago, the 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 principal limit. 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.
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