So it seems that FHA asked the US Department of the Treasury for a $1.7 billion bailout caused by defaulting reverse mortgages (also called Home Equity Conversion Mortgage). Reverse mortgages help seniors borrow against the value of their home without making payments. In fact, the bank pays the borrower either a monthly payment or a lump sum. The Federal Housing Administration, that currently insures a bulk of these loans, is currently $5 billion dollars in the hole on its reverse mortgage program.
This is one of the main reasons that the reverse mortgage program is undergoing changes starting January 2014. Sources say that the pool of eligible borrowers will decrease by as much as 22 percent. The changes are not yet final and they are outlined in a recent Mortgagee Letter by HUD (the mortgagee is the lender). The Mortgagee Letter establishes a first year disbursement limitation and adds a life-expectancy set aside for property charges when required by the mortgagee. The Letter also provides updated instructions for calculating the initial disbursement to the mortgagor at loan closing (mortgagor is the homeowner).
The most important of the changes are the FICO score and the overall financial assessment of the borrower will be considered prior to approval. Historically, income and FICO were not considered in reverse mortgages. Now, documenting and verifying credit, income, assets and property charges is a requirement. I hope it all goes well for the seniors. It seems unfair to deny someone who has been planning their retirement with the current rules in mind.
This guidance is effective for HECM case numbers assigned on or after January 13, 2014.