Popular reverse mortgage cuts loan limits

While reverse mortgages have become a bigger part of the senior population's financial picture, the nation's most popular program has undergone a mandatory change that will reduce the total proceeds available to FHA-insured reverse mortgage borrowers.

The move is in response to a projected $798 million shortfall in the Federal Housing Administration's budget for the Home Equity Conversion Mortgage in fiscal 2010. The fiscal year for the U.S. Department of Housing and Urban Development, the agency that oversees FHA, began Oct. 1.

FHA is now shouldering a greater portion of the residential loan load and its insurance component has come under greater scrutiny because of it.

In a letter to all reverse mortgage lenders dated Sept. 23, 2009, David H. Stevens, HUD's new assistant secretary for housing and federal housing commissioner, said changes in the agency's popular Home Equity Conversion Mortgage program were necessary "to assist with the viability of the program."

A reverse mortgage enables senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free. But the instruments are complex and may not be a good fit for all seniors.

"In a nutshell, the commissioner explained that from its enactment, the HECM program was intended to operate without any credit subsidy," said Peter Bell, president of the National Reverse Mortgage Lenders Association, a nonprofit trade group based in Washington, D.C.

"Since the congressional appropriations process is unlikely to provide credit subsidy, program changes are the only viable route for keeping the program operating past Sept. 30."

The result is a 10 percent reduction in what HUD labels as the "principal limit factor" on all reverse mortgages applied for on or after Oct. 1, 2009. This factor reduces available proceeds to reverse mortgage borrowers.

Here are two examples of the new HECM maximum amounts with the principal limit factor:

71-year-old borrower in a $370,000 home with a HECM fixed-rate loan at 5.56 percent

Total cash available (after closing costs and set-asides):

• Through Sept. 30, 2009: $240,436.31
• On or after Oct. 1, 2009: $211,511.85 ...CONTINUED

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