One of the chief knocks against reverse mortgages is that the most popular program does not go far enough in extending seniors the funds they need.

The Home Equity Conversion Mortgage, or HECM, is insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development, and makes up more than 80 percent of all the reverse mortgages written in the country. The maximum loan limit is pinned to the homeowner’s age, home value and home location. The location dictates the maximum claim amount, which varies by county. These amounts can range from $200,160 in rural areas to $335,800 in urban areas.

Last month, the U.S. House of Representatives took a giant step towards eliminating the geographical barrier by passing the Expanding American Homeownership Act of 2006 (H.R. 5121), which would create a single national loan limit for the HECM program equal to the conforming Freddie Mac loan limit of $417,000 for 2006.

A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their homes, without having to sell the home, give up title, or take on new monthly mortgage payments. Loan proceeds can be used for any purpose, and can be taken out as a lump sum, fixed monthly payments, line of credit, or a combination. The loan amount depends on the borrower’s age, current interest rates, and the value and location of the home.

A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s estate. A senior’s home does not have to be owned free and clear to qualify for a reverse mortgage. Reverse mortgages are often used to retire existing debt on a home.

The early reverse-mortgage programs got a poor reputation because some were flawed and contained huge appreciation shares for the lender coupled with big-time upfront fees. Now, with the federal government insuring a majority of the reverse mortgages with no lender equity shares, the concept has become more acceptable and recognized by consumers.

Raising the local loan ceilings for senior borrowers would be well received. Two privately funded national studies showed participants were frustrated with the inability to fully tap their large and growing equity. Respondents noted their increasing property values and living expenses, as well as their difficulty in making ends meet with the current HECM loan limits.

The Expanding American Homeownership Act, which passed 415-7, would make other substantial improvements to the FHA HECM program. The new legislation calls for a “home purchase” option that would allow people to use a reverse mortgage to purchase newer housing that better suits their needs plus removing the volume cap on the number of HECM loans that FHA can insure.

President Bush also issued a statement thanking the House for passing H.R. 5121and urged the Senate to pass its own version, known as S. 3535.

Rep. Jay Inslee, D-Wash., who co-sponsored the elimination of the loan cap, said a single national limit would put more cash in the hands of more seniors who need it.

“We’ve found that our country’s seniors really need help with health care and assisted living,” Inslee said. “They are equity-rich but cash-poor in a lot of circumstances. By freeing up more potential cash from their home, many more of our seniors can live more comfortably.”

Another part of the bill would require HUD to study the mortgage insurance premiums charged on a HECM loan. This bill gives the FHA the authority to charge fees based on the borrower’s risk of default. Currently, the FHA charges all borrowers the same 1.5 percent upfront fee and 0.5 percent annual fee for mortgage insurance, regardless of the borrower’s risk of default.

Under current law, the FHA may guarantee a cumulative total of 250,000 such loans. When Congress created the HECM program in 1988, this 250,000 “cap” was imposed so lawmakers could periodically monitor the program’s performance and costs to the government. Now that the program has a track record, there’s no continuing need for a cap because the HECM program generates sufficient funds to cover its costs through mortgage insurance premiums paid by borrowers.

Tom Kelly’s book “The New Reverse Mortgage Formula” (John Wiley & Sons) is now available in local bookstores and on Amazon.com. He can be reached at news@tomkelly.com.

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