Facing the potential of another principal limit reduction for the Federal Housing Administration’s reverse mortgage program, the US Department of Housing and Urban Development (HUD) is working on a solution to reduce (possibly eliminate) the need for the $250 million appropriation requested in the Office of Management Budget for FY 2011.

At the National Reverse Mortgage Lenders Association’s Washington Policy conference last week, Colin Cushman, Director of Portfolio Analysis at HUD detailed a new two reverse mortgage product approach he hopes could be adopted by October 1, 2010.

The new solution engineered by HUD would provide borrowers with two reverse mortgage product options. The first is a needs based HECM product which includes a 2 percent upfront mortgage insurance premium (MIP), 1.25 percent annual MIP, and is close to the same principal limit factors available today.

FHA is also developing the “HECM Lite”, a new product meant to compete with a home equity line of credit. Created for borrowers who are looking for less money, the HECM Lite has no upfront MIP, a 1.25 percent annual MIP, and lower principal limit factors. Designed to be a pay as you go product, Cushman said it would help lower the risk to the FHA insurance fund and offer borrowers an additional option not currently available.

FHA is working with the Office of Management and Budget to evaluate the two product solution which Cushman believes would offset the need for the $250 million appropriation. However, if rolling out the new changes isn’t possible by October 1st, “a bridge appropriation, heightened premiums, and or reduced principal limit factors may be required to operate the HECM program,” he said.

During the presentation, Cushman said HUD understands another deep cut to principal limits for FY 2011 would greatly impact the number of seniors who have access to the program. He made it clear to attendees that HUD does not want to see it happen.