Saver reverse mortgage gets little traction

HUD’s HECM Saver product was supposed to create new demand for reverse mortgages, to create something cheaper and therefore more attractive to seniors.

Alas, despite objectively better terms, the HECM Saver is going nowhere. Since October 1st just 259 HECM Saver loans have been originated.

HUD correctly notes that there were 165 Saver originations in January, a figure up 120 percent from the 75 originated in December. What’s not said is that Saver product represents 1 percent of all home equity conversion loans originated this year — or that the old, traditional HECMs continue to hold 99 percent of the market.

Why this should be is unclear.

With a Standard HECM the upfront mortgage insurance premium is equal to 2 percent of the property’s value. With the HECM Saver the up-front MIP is .1 percent. (The annual MIP is 1.25 percent of the outstanding loan balance for both products.)

“Despite the popularity of our HECM loan product, we have noted concerns that some senior citizens find that our fees are too high for them,” said FHA Commissioner David Stevens. “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.”

In other words, there is a huge cost reduction available to seniors who choose the HECM Saver. Given the natural urge to find bargains, why do we not see more HECM Saver originations?

Imagine that you have a Standard HECM for a property valued at $250,000. The upfront MIP would be equal to 2% of the fiar market value or $5,000.

With the HECM Saver the upfront MIP would be $25.

With the HECM Saver, the low up-front charge means that a line-of-credit can make sense because with little cost up front you would only pay interest and the annual MIP on the outstanding loan balance. This could actually be a small amount, meaning that access to more cash would be available when needed and that the property could be readily refinanced in an estate situation if the heirs want to keep the property.

The stumbling block, perhaps, is that with the HECM Saver you cannot get as much as with the standard product. Combine lower loan amounts with reduced home values in many areas and seniors may not be able to get desired cash.

The reason for the lowered loan percentages, of course, is that with HUD insuring HECM Saver loans the government wants as little risk as possible.

It will take a little more time to see what really happens with the HECM Saver program. One issue is how much consumers actually know about the product. Another is whether it produces sufficient revenue to attract lender interest. In either case, for those seniors considering a reverse mortgage it’s wise to look at both FHA options and not just one. For specifics, speak with lenders, fee only financial planners and attorneys who specialize in elder law.

 

This entry was posted on Wednesday, February 2nd, 2011 at 12:32 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.