HECM overhaul continues, curbing eviction follows

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The Federal Housing Authority (FHA) will address the non-borrowing spouse dilemma in Home Equity Conversion Mortgage (HECM) following the suspension of fixed rate mortgage (FRM) for HECM Standard on April 1, 2013.

According to a report published by MarketWatch, the U.S. Department of Housing and Urban Development (HUD) intended to come up with provision addressing the growing number of surviving spouses facing eviction by October of this year.

The report mentioned that non-profit AARP pegged the number of seniors who have been evicted from their property after the death of the borrowing spouse at over a thousand.

HECM is an FHA-insured program designed to help homeowners aged 62 years and older to use home equity as collateral for a loan to be disbursed according to a pre-agreed payment option. FHA-approved lenders can only collect payment from the reverse mortgage loan when the homeowner-borrower passes away or makes the decision to move permanently out of the property.

The surviving spouse faces eviction when the deed indicates that the deceased spouse is the sole owner of the property subject to HECM. Some seniors, especially in cases where in a couple have a large age gap, elect to name a deed to the older spouse in order to avail a bigger amount from HECM loan.

The MarketWatch report cited an industry source saying FHA and HUD may require lenders to identify both spouses as borrowers, but are still figuring out how to address cases when a spouse is younger than 62.

The report came after FHA largely limited HECM product to HECM Saver. HECM Standard may only be used now with adjustable rate mortgage (ARM). HECM Saver, on the other hand, can be availed either through FRM or ARM.

Majority of reverse mortgage borrowers elects for a lump sum loan available in FRM. According to Consumer and Financial Protection Bureau (CFPB), 73% of borrowers in 2011 took all or almost all of their available funds upfront at closing. A few elects for a reverse mortgage line of credit available in ARM.

According to Charles Coulter, HUD’s Deputy Assistant Secretary for the Office of Single Family Housing, the agency is poised to implement a string of changes for the industry to remain viable. An actuarial review of the FHA mutual mortgage insurance (MMI) fund for HECM loans published on November 15, 2012 revealed that it was at staggering $-2.8 billion.

Added to this was an insurance-in-force (IIF) amounting to $78.21 billion at the end of 2012. IIF is the total claim for HECM loans.

The negative value of MMI fund in 2012 was an immense downward spiral from its estimated value in 2011 of $1.4 billion.

According to the report, factors like house prices appreciation rates, interest rates, mortality rates, and cash drawdown rates negatively impact the HECM MMI fund. Cash drawdown rates refer to the pace at which borrowers access the equity of their property over time.

Aside from placing a cap on FRM to mitigate the losses, HUD also plans to implement a financial assessment and establish a program similar to an escrow account.

 

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