Reverse Loan Limits Rise, But Questions Remain

The National Reverse Mortgage Lenders Association says that the Department of Housing and Urban Development (HUD) has approved a single national loan limit of $417,000 for federally insured Home Equity Conversion Mortgages (HECM).

Previously, says NRMLA, “the HECM program assigned different lending limits by county ranging from $200,160 in rural areas to $362,790 in the highest home value areas.”

We ought to ask: What else is there we need to know? For instance:

___When, exactly, do the new and higher limits go into effect? NRMLA says HUD is aiming for November 1st.

___What about origination fees? You remember, the origination fee was limited under the FHA Reform package but HUD’s insurance premium was not. Are there origination fee changes that we ought to know about?

___Why is the new limit $417,000 and not $625,000?

A new and higher reverse mortgage loan limit makes sense for many areas where typical home values have been vastly higher than allowable reverse mortgage limits. The idea of a single national limit makes a lot of sense and is far easier to understand that the range of limits previously used by HUD.

That said, higher limits for reverse mortgages — or home equity conversion mortgages (HECMs) as HUD calls them — are too little too late for many potential borrowers.

The problem is that many seniors have less equity than they had a year ago — and much less equity than they had two years ago. As an example, the National Association of Realtors reports that “the national median existing-home price for all housing types was $203,100 in August, down 9.5 percent from a year ago when the median was $224,400.”

The new and lower home prices seen in many communities are, in fact, understated. To understand why you need to look at what is being reported.

When we look at existing home sales we are looking at the gross sale prices reported in local MLS systems and property record offices. When home values are steady or rising such reports are reasonably accurate. However, when values are falling home price reports are generally overstated.

Why?

Because when markets stall owners make deals. Such seller “contributions” are allowed by mortgage lenders and can total from 3 percent to as much as 9 percent of the sale price. These discounts — and that’s what they are — are NOT deducted from reported sale prices.

HUD, as one example, allows seller contributions of up to 6 percent for FHA mortgages. As it explains: “The seller’s maximum contribution to the homebuyer’s actual closing, prepaid expenses, discount points, and other financing concessions remains at 6 percent of the sales price. Seller contributions in excess of 6 percent will continue to require a dollar-for-dollar reduction to the mortgage.”

For seniors the new and higher loan limits reported for HUD provide more reverse mortgage options and should be welcomed. A single loan limit rather than a series of community-based limits is a huge improvement in clarity. As to the specifics regarding origination fees, dates and such, we’ll need to wait for HUD’s official announcement.

This entry was posted on Tuesday, October 7th, 2008 at 5:45 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.