The loan-limit reduction comes at a curious time.
While housing continues to be one of the nation’s most critical issues, some analysts believe lowering the maximum mortgage amount consumers can borrow could slow down the pace of buying and selling even more.
Beginning Oct. 1, the Federal Housing Administration installed new ceilings on mortgages it will insure in high-cost areas. Fannie Mae and Freddie Mac did the same.
FHA does not believe the ceiling reductions are any big deal. Only 669 of the 3,234 jurisdictions in which it insures loans will see any change, according to FHA. The agency also said that just 3 percent of FHA-insured borrowers live in high-cost markets. Still, Realtor groups and builders say now is not the time to limit any housing options.
Ken Fears, manager of regional economics for the National Association of Realtors, recently completed a study on the impact of lowering the nation’s lending ceilings titled, "Small Market Share, Big Economic Impact."
Fears estimated that the move would mean 16,573 "lost" annual sales, amounting in a loss of more than $34.3 million in transfer fees (county excise taxes) and an economic impact of more than $1.9 billion.
"The housing market is in recovery mode, and while a healthy market implies an expanded private presence in the mortgage market, the costs of what appears to be a small shift could have large impacts for local economies," Fears wrote.
What did not change is the ceiling for the Home Equity Conversion Mortgage (HECM), the FHA-insured reverse mortgage that continues to be the nation’s most popular reverse mortgage program. The HECM ceiling remains at $625,500 through the end of the year.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
HUD is also trying to eliminate more cases of the surviving spouse or "trailing spouse" problem that have recently ended up in the courts by requiring nonborrowing spouses to undergo counseling and to sign and date the counseling certificate.
When one spouse dies, the surviving spouse (typically female) who remains in the home was part of the reverse mortgage agreement when it was first signed. However, some spouses chose to be left out of the document, usually because they were too young to qualify or because including them would have meant a reduced amount.
Recently, some of those trailing spouses who were never vested in the reverse mortgage want to stay in the home without paying off the underlying reverse mortgage. These cases have become extremely emotional, involving senior activists, AARP and eager attorneys.
A new requirement regarding counseling participation specifies that all owners shown on the deed must be present for counseling, as well as any non-owner spouse. The new requirement means that any quitclaiming owner, who will not be a HECM borrower, is required (no longer recommended) by HUD to receive counseling and sign a counseling certificate.
There’s also more light on the counseling front. Counseling agencies that were awarded a portion of the $10 million in new grants announced recently by HUD may use the funds to counsel existing HECM borrowers whose loans are in technical default for nonpayment of property charges, such as property taxes and homeowners insurance.
The $10 million is unspent funding from the 2010 appropriation that was recompeted and awarded to HUD-approved counseling agencies.
In April, the $38.5 billion slashed from the national budget for the remainder of fiscal year 2011 was the entire $88 million that the U.S. Department for Housing and Urban Development requested for housing counseling, including approximately $8 million that was targeted for reverse mortgage counseling for seniors.
While the bulk of the new-grant counseling funds are to be used for foreclosure prevention counseling, assistance with application to federal and other mortgage modification and loss mitigation programs, HUD said that counseling agencies may be reimbursed for assisting HECM borrowers.
It will be an important final quarter of the year for housing and a critical time for the fragile reverse mortgage industry.