A popular type of reverse mortgage may become less so, due to rising defaults that prompted the Federal Housing Administration to make changes at the beginning of this month.
The standard fixed-rate HECM, or Home Equity Conversion Mortgage, offered qualified reverse mortgage borrowers a lump sum of their home equity with a fixed rate. Now, the FHA says that beginning April 1, those loans are only available with a variable rate and a smaller lump sum. Borrowers seeking a fixed rate can still get the Saver Fixed-Rate HECM, which also comes with a smaller lump sum.
Change arises from rise in defaults
The FHA reports that 10 percent of the HECM loans it insures, in the amount of $2.8 billion, were in default in 2012, up from 2 percent a decade ago. By giving borrowers less cash upfront, the hope is that homeowners will not spend it too quickly.
Reverse mortgages have been an option for homeowners age 62 or older who want to turn their home equity into a fixed income in retirement. The lender pays a monthly payment for as long as the homeowner lives in the home or for a specified period. They generally come with higher interest rates as well as higher fees and closing costs than traditional mortgages, making them an expensive option in many cases.
The change to the standard HECM is one of several proposed changes announced by the FHA in an effort to bolster its Mutual Mortgage Insurance Fund, which has been depleted during the housing crisis. The next wave, expected in August, could include higher mortgage insurance premiums and additional underwriting standards.
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