Ocober 2 2010 (Shirley Allen)

On Friday, October 1st, the Federal Housing Authority (FHA) approved a new reverse mortgage product that sharply cuts upfront payments by home owners but also significantly reduces the percentage of a home’s equity that can be paid to owners under the program.

The new program, called the HECM Saver loan, will become available in early October and differs from the FHA’s previous reverse mortgage program, now known as the HECM Standard loan. Here are some of the differences:

The Saver loan will largely eliminate the agency’s initial insurance fee, which is now 2 percent of the amount of the loan. This could cut thousands of dollars off of product fees, which have been criticized as too expensive.

“We have noted concerns that some senior citizens find that our fees are too high,” FHA Commissioner David Stevens said in a news release. “In response, we created HECM Saver which will provide seniors with a reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium (MIP) that is required under the standard HECM option.”
However, the new product would also substantially reduce loan proceeds. The FHA said HECM Saver loans would pay out 10 to 18 percent less of a home’s equity than the traditional Standard loan.

The new Saver loan was designed as response to shield the government from losses on the HECM Standard Loan program. The FHA said the lower payout of the HECM Saver program would “substantially” reduce risk to its insurance fund.

Under the HECM program, a homeowner can access a specified percentage of his or her home’s equity. The percentage varies, but the most important variable is how old the borrower is at the time of the HECM loan. Proceeds of the loan must first be used to pay off any existing mortgage on the home. The borrower then can choose to receive the remaining funds as a lump sum, through a line of credit or via monthly payments. Loan costs are effectively backed out of the remaining equity in the home and the home owner faces no further home payments save for insurance, taxes, and upkeep expenses.

If the homeowner lives in the home for a long time and cumulative loan costs exceed the remaining equity, the FHA insurance fund pays the difference. Homeowners face no further financial obligations no matter how long they remain in the home. If positive equity remains in the home when a homeowner leaves the home, he can retain title to the property or, in the event of his death, bequeath it to heirs.

Mandatory consumer counseling is a required part of the government’s HECM program. Because of the complexity of the loans, including the new Saver loan option, consumers should make sure they fully understand all fees and loan terms before taking out a HECM loan. When the prospective HECM borrower meets with a lender, a Good Faith Estimate or the Truth in Lending Act Disclosure will be provided for the purpose of making a true comparison between Saver and Standard and other costs associated with obtaining the HECM.