Mortgage Professor: Reverse Mortgage Changes, The Good and the Bad

The Federal Housing Administration-insured reverse mortgage program is getting a comprehensive makeover as the agency attempts to stanch past losses and prevent future ones to its Mutual Mortgage Insurance Fund, writes Jack Guttentag—aka the Mortgage Professor—in a recent column.

“Sweeping changes” have arrived in response to a large number of borrowers taking all of their loan proceeds upfront, leaving them with no borrowing power down the road and going against reverse mortgages’ intended use, says the column.

“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,” writes Guttentag. “Borrowers who cashed out early, furthermore, had less incentive to stay current on their property taxes and insurance, which increased losses to the FHA.”

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Now, the FHA has limited how much of their principal limit borrowers can access up front and throughout the life of the loan, with the size of the mortgage insurance premium dependent on the initial draw amount.

“The bad news is that the HECM program is now even more complicated than it was,” he writes. “While it is not clear whether or not the new rules will succeed in discouraging early cash draws, it is very clear that these rules have made it more difficult for seniors to sort out their cash draw and options for mortgage insurance, or MI.”

Read the full column here.

Editor’s note from Jack Guttentag: “My recent article on the makeover of the HECM reverse mortgage program has a mistake in it. I said that the borrowing limits had been increased when in fact they have been reduced. My deepest apologies to seniors, industry people and other readers.”

Written by Alyssa Gerace