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FHA to Reduce HECM Proceeds and Raise Premiums in October

During a call with industry leaders last week, the Department of Housing and Urban Development said it plans to raise the annual insurance premium charged to borrowers and reduce the amount of money they can receive from the Home Equity Conversion Mortgage (HECM).

Starting Oct. 4th, the principal limits for Federal Housing Administration’s reverse mortgage program will decrease between approximately 1% and 5% from where they currently stand.  The changes will have less of an impact on younger borrowers, while older borrowers will see the biggest reduction in the amount of money available.  Additionally, the agency said it will raise the annual mortgage insurance premium from 0.5% to 1.25%.

It’s the second time HUD has been forced to reduce the principal limits in the last two years.  While not as steep as the 10% haircut from last year, Vicki Bott, Deputy Assistant Secretary for HUD said the changes are necessary to ensure the program is sustainable.

Earlier this year, the Obama Administration requested a $250 million credit subsidy for the HECM in its FY 2011 budget to offset projected losses for the program.  While an appropriation bill passed by the House of Representatives provides $140 million for the program, the Senate has yet to bring its appropriations bill to the floor.  At the moment, Senate Appropriators have included $150 million for the program in the Transportation, HUD, budget for FY 2011.

According to HUD, loans with a case number assigned prior to October 4th will still be eligible for the previous principal limits.  A mortgagee letter explaining the changes will be published in September.

In addition to these changes, HUD is expected to release a new low cost reverse mortgage product in October.

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