Higher HECM Limits Could Help Retirees
Banking Investment Consultant - November 6, 2008
New regulations signed into law July 30 this year by President Bush, take effect today, Nov.6, raising the maximum amount homeowners 62 years or older can "borrow" by selling their homes back to the bank finally became official.
The new law, H.R. 3221: Housing and Economic Recovery Act of 2008, raises the maximum amount of a reverse mortgage to $419,000, up from the old limit of $200,160 in rural areas and $362,790 in metropolitan centers.
It also caps closing costs on reverse mortgages at $6,000. Prior to the implementation of the new law, closing costs could easily run to $7,000 or more. HUD approved the new limits Oct. 2 and set their effective date a month later. HUD had missed its soft Nov. 1 deadline but came through on Nov. 6, although it dated its Mortgagee Letter announcement about origination fee limits Oct. 31.
While the law was signed this summer, it has taken HUD a few months to work out how H.R. 3221 should best be administered, which is obviously of little surprise: The subprime crisis and its catastrophic effect on the economy have clearly taken precedence. "It's a busy time for Federal regulators dealing with housing," notes Peter Bell, president of the National Reverse Mortgage Lenders Association in Wachington, D.C.
Regardless of the financial crisis, though, reverse mortgages have gained in popularity among their target demographic-homeowners at retirement age-as people look to ways to fund their retirement. According to the latest report from the NRMLA issued Oct. 14, the industry closed 112,100 home equity conversion mortgages, or HECMs, in the fiscal year 2008, which ended Sept. 30, surpassing the record loan volume of 107,558 for fiscal year 2007. (The report didn't contain actual dollar amounts for those reverse mortgages.)
Bell predicts new higher maximums will only fuel this fire, creating a "surge of activity" as people look to home equity as a source of retirement income. Some lenders were already closing loans based on the higher limits and lower fees before HUD confirmed the new limits in one of its Mortgagee Letters, which is how the department communicates new guidelines to the mortgage industry. While HUD is allowed this activity, it wouldn't insure those loans until the Mortgagee Letter went out. The department allows 60 days to register for that insurance, so lenders are hypothetically only assumed a small risk-investors such as Fannie Mae won't buy a loan that isn't insured. But even if it delayed this guidance beyond 60 days, HUD can still decide to cover a loan on the merit of its claim.
The borrower, whoever it is that originates the loan, pays an upfront insurance premium of 2% if the house's value or $417,000 loan limit, whichever is smaller, plus 0.5% of the outstanding amount of the loan each year.
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