While loan limits for conventional mortgages recently were raised with the passage of the Economic Stimulus Act of 2008, those seniors hoping to tap into additional home equity via the nation’s most popular reverse mortgage are stuck with the same loan ceilings — at least for now.
The Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, insures the Home Equity Conversion Mortgage (HECM), which accounts for nearly 85 percent of the reverse market. The HECM program has insured more than 240,000 reverse mortgages since 1990, while private jumbo reverse plans also have been available.
While FHA announced a temporary increase in loan limits for all "forward" mortgages as a result of the new legislation, HECMs were not included in the Economic Stimulus Act. FHA’s loan limits for HECMs will retain the existing "floor" of 48 percent of the conforming loan limit or $200,160, as well as the "ceiling" of 87 percent, or $362,790. Those areas in between are limited to 95 percent of the local median home value.
"This is very disappointing," said Lee McCutcheon, a reverse mortgage specialist. "There are many seniors who have been waiting for the higher figures to be in place so that they could obtain a reverse mortgage or refinance an existing reverse mortgage. The increased limits would really help, and hopefully they will be adopted soon."
A reverse mortgage is a loan against a home that is not payable until the homeowner dies, sells the home or permanently moves out. Reverse mortgages allow homeowners age 62 and older to turn the equity in their home into cash without having to move or make a monthly mortgage payment. There is no minimum credit or income requirement to qualify for a reverse mortgage.
Many prospective borrowers believe they can qualify for a reverse mortgage equal or close in size to the value of their home, or at least the local FHA loan limit. This isn’t the case. The actual loan amount will be equal to a smaller amount than these two figures (but still a substantial fraction of the home’s value) in order to ensure that there will likely be sufficient equity left in the home when the loan comes due to assure full repayment.
According to Peter Bell, president of the National Reverse Mortgage Lenders Association, some regional increases in HECM loan limits were discussed as part of the stimulus package, but HUD ultimately focused on the conventional "forward" market and left HECMs out of the picture.
The FHA Modernization Bill, meanwhile, would increase the loan limit for HECMs to a single national limit of $417,000 plus add other reverse mortgage changes. While the entire "FHA Mods" bill once was a candidate to be rolled into the economic stimulus package, the final version of the stimulus package passed by the House of Representatives dropped all of the FHA provisions other than conventional loan limits.
Those limits are based on median home price, and range from a new floor of $271,050 up to a cap of $729,750. The stimulus package includes an increase in loan limits for Fannie Mae and Freddie Mac (with an upper cap of $729,750, up from $417,000).
The new loan limits will expire Dec. 31, unless Congress makes permanent increases part of pending legislation that would strengthen oversight of Fannie Mae, Freddie Mac and FHA loan guarantee programs.
The FHA Modernization Act is still being negotiated, and industry officials hope to have a compromise hammered out and accepted by early summer. If all the HECM pieces are retained, it will include:
- a single national loan limit at the GSE limit
- HECMs for home purchase
- HECMs for co-ops
- permanent lifting of the HECM authorization cap
- a limitation on HECM origination fees at 1.5 percent of the maximum claim amount
- broader provisions regarding manufactured homes
Just how large is the reverse mortgage market? According to the United States Bureau of the Census and the National Center for Health Statistics, the older population — those 65 years of age and older — numbered 35 million in 2000. While the years since the last census have altered the numbers, it showed the over-65 group represented 12.4 percent of the population — about one in every eight Americans. The census data showed nearly 80 percent of the nation’s seniors own their own homes, and 73 percent are owned free and clear of any mortgages, amounting to nearly $1.9 trillion in home equity.
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