[Loan Doctor]

The recent signing of the HOUSING AND ECONOMIC RECOVERY ACT OF 2008 (HR 3221) by President Bush puts into motion something that has been long in the making and that’s a modernization of FHA rules for reverse mortgages. Some of the changes facing potential reverse mortgage clients are an increase in the national lending limit from the individual county limits now in place. Folks in some parts of the country will see their lending limit rise from as low as $200,160 to an anticipated $417,000 and that’s good news for those with home values over their county lending limits since any equity access was determined from the lower of the appraised value or the respective county lending limit. In many cases where the reverse mortgage was to utilized to pay off an existing forward mortgage there wasn’t enough cash access to pay off that mortgage and the borrower either had to come to the table with money or look for alternative methods which often led to selling the home and in a down market, that’s neither easy or fun.

Another change is with the origination fee, currently capped at 2% of the lesser of the appraised value or the county lending limit. The new bill will keep the 2% up to $200,000 but cap the origination fee at $6000 which is more than $1200 less than some of the highest fees where county lending limits were as high as $362,790. In that case, 2% of that amount would have resulted in an origination fee of $7255.80.

Higher lending limits combined with lower origination fees are great for those seniors whose circumstances have them looking at ways to increase their monthly cashflow without making risky investments in a roller coaster stock market.

Some new additions to the bill are for folks in co-ops and those looking to use the reverse mortgage as a finance tool to help them purchase a home, most likely in a downsizing event. Currently, only New York co-op owners are able to secure reverse mortgages because of their prevalence. There are other pockets of the country with co-ops and this will be a relief for those co-op owners as other means of financing have disappeared as most boutique programs are no longer available. In the event someone wants to downsize from a larger, more expensive home, the ability to purchase a home using a reverse mortgage is also a welcome addition. As an example, someone in a $400,000 home can sell the home, take a portion of the proceeds for purchase of a less expensive home, say $200,000, and instead of putting up the entire value in cash, they can put down a small portion, in this example, half of the value and finance the other half and not only do they eliminate monthly mortgage payments, they keep a larger portion of their cash in their pocket and in this market, cash is king. Instead of having $200,000 left over from the sale of the home, they now have $300,000 and no monthly payments as long as they live in the home. That’s also great for those that don’t currently qualify for a regular mortgage because of bad credit or insufficient fixed monthly income as those programs have gone the way of the other boutique programs once offered by most forward lending brokers.

Some other features are a prohibition against requirements to purchase additional products as a condition for HECM eligibility such as annuities or life insurance policies. That is good news as the recent negative information about reverse mortgages has been because of this very practice. Folks short on cash flow that need a reverse mortgage should not have their money tied up in any annuity, be it immediate or deferred. The reverse mortgage provides more cash flow with less restrictions than the annuity could anyway in most situations where monthly cash flow is short. Another mention is about a study to determine consumer protections and underwriting standards for HECMs which will help to insure that purchase of any additional products by a consumer is appropriate for the consumer.

We like the new changes, they are consumer protection focused and open up opportunities to help save some homeowners from increasing monthly payments on their forward mortgages that were having a harder and harder time making that increased payment amount and the homebuying function is a great tool for credit challenged or those looking to downsize into more affordable housing.