FHA Constricts Cash Withdraws on Reverse Mortgages
[Update 1 adds statement by FHA commissioner David Stevens] The Federal Housing Administration (FHA) decreased the principal limiting factors (PLF), or the amount seniors can claim in cash withdraws against their home, for reverse mortgages or home equity conversion mortgages (HECMs), according to a letter addressed to FHA lenders dated September 23. The Housing and Community Development Act of 1987 established a federal mortgage insurance program that would insure HECMs to be administered by the Department of Housing and Urban Development (HUD). The program insures reverse mortgages and is designed to enable homeowners above the age of 62 to convert equity in their homes to monthly streams of income, according the HECM handbook. The PLF, which determines the amount of equity that can be withdrawn, is based on the age of the youngest borrower, the expected average mortgage interest rate and the maximum claim amount. FHA decreased the principal limit that can be received by the borrower by 10%. Before the changes, the PLF for a 75-year old borrower with a 7.75% interest rate was .554. If the home is appraised at $165,000 in an area where the maximum mortgage limit was $151,725, the initial principal limit could be determined by multiplying the mortgage limit by the PLF. That borrower could receive $84,055.65, according to the HECM handbook. With the new changes, that same borrower with that same interest rate will have a PLF of .498. Using the same value of the home and the same maximum mortgage limit, the borrower can now receive only $75,559.05, a 10% decrease. The new PLFs must be used for all HECMs for loans that received a FHA case number on or after Oct. 1, 2009, according the letter. For loans that received a case number before that date, the old PLFs apply. FHA reduced the PLFs “to assist with the viability of the program,” according the letter signed by David Stevens, FHA’s commissioner. “We are taking prudent steps at this time to protect the viability of the HECM program and the market it serves. For several months, we have been working on changes to the program to improve performance and mitigate growing risk concerns. As the popularity of HECM continues to increase, we are taking steps to make certain the program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option,” Stevens said in a statement. The adjustment comes after another policy change last week by the FHA to reduce risk and strengthen the FHA’s reserves. Write to Jon Prior.