Tighter underwriting standards will become effective on March 2, 2015 for Home Equity Conversion Mortgages ("HECM") insured by the Federal Housing Administration ("FHA"). FHA made this announcement last week according to an article by Ken Harney in the Hartford (CT) Courant and various other newspapers around the country.
The HECM loan program is also known as a reverse mortgage and is available only 
to borrowers who are 62 years of age or older. According to Harney's article, the default rate on reverse mortgages insured by the FHA is about 10%, which is higher than most loan programs. Presently, according to the FHA website, there are no credit or income qualifications for HECM loans. Underwriting is based upon an appraisal of the property to be mortgaged almost entirely, and FHA is not allowed to pay directly taxes or home owners insurance or escrow for those items. The borrower is fully responsible for paying those items, although the borrower can draw funds from the HECM to make those payments.
As of March 2, 2015, lenders will be required to review credit reports, payment histories, income, and recurring household debt obligations. In addition the FHA will have the authority to set aside loan proceeds or otherwise escrow for taxes and insurance. The new process for HECM loan applicants will resemble the underwriting process that most borrowers go through for other types of loans on which payments are required. No monthly payments are required on HECM loans until the property is no longer occupied by the borrower because of death or otherwise.
These tighter standards for HECMs have been kicking around Congress since at least March 2013, and in July 2013, a bill was introduced in the Senate entitled the FHA Solvency Act of 2013. None of the legislation appears to have made it out of committee.
If you have parents, other relatives, or clients that are contemplating a reverse mortgage to fund part of their retirement needs, they need to act before March 2, 2015 to avoid these much tighter standards by FHA. They will face a much different scenario after March 2, 2015.
Image courtesy of Ambro, freedigitalphotos.net
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