Today, July 26^th, the Senate passed HR 3221, Foreclosure Prevention Act of 2008, also known as the "FHA Modernization Act" and the President is expected to sign it immediately.

This bill provides for needed housing reform in general but has direct impact on the HECM (Home Equity Conversion Mortgage) specifically.

The bill will establish one national FHA lending limit for HECM's at $417,000. (The limit will be increased for high cost areas to $625,500 on January 1^st, 2009). Currently the highest FHA lending limit is $362,790.  What this legislation means for senior borrowers is that they can now access more of their equity.  For example, I have 69 yr. old clients who can barely make their house payment.  Their mortgage balance is $275,000.  Their home is worth approximately $450,000.  With the current county lending limit of $362,790, they are only eligible for $224,500 which won't cover their mortgage.  They are what we call in the industry "short-to-close" by about $50,000.

Now, with the increased lending limit of $417,000 they have access to an extra $54,000 of their equity which will be enough to pay off their mortgage.  They are going to be thrilled!

The increase in the lending limit is a real blessing for some folks.  However, it won't make a bit of difference if the value of the home is under the current lending limit.  For example, if a borrower has a home value of $350,000 in a county with a lending limit of $362,790, no extra equity is available.  However, if that same home is in a county with a county lending limit of $206,000, the increase in the lending limit will free up $144,000 more that they can access! This legislation is a HUGE benefit in counties with lower lending limits but higher priced homes. 

The other benefits to seniors are:

• HECM for home purchase
• Co-op product provisions
• Origination fees of 2% on the initial $200,000 in maximum claim amount and 1% on the balance thereafter with a cap of $6,000
• Prohibitions on requiring the purchase of annuities and other financial products.
• Restrictions around cross selling financial products.
• Requirements on counseling protocols, funding and practices that promote independence and quality in counseling.

It is about time that someone restricted the cross selling of financial products and annuities to seniors.  These are for the most part inappropriate products and have given reverse mortgages a bad name. It was not so much the reverse mortgage itself, but the inappropriate use of the proceeds that created the bad press.

The reduction in fees has been a long time coming!  The origination fee is now capped at $6000.  Prior to this bill, the maximum origination fee was $7255.  Now seniors can access more equity at a lower cost.  We are making progress!