The federal government is ending fixed-rate, lump-sum loans for its most popular reverse mortgage product. Starting April 1, homeowners who apply for a reverse mortgage under the Home Equity Conversion Mortgage (HECM) Standard program will only be allowed to receive loan proceeds in the form of a line of credit or monthly payments at an adjustable interest rate.
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Any fixed-rate loans under the HECM Standard program in process before that date must close by July 1. Fixed-rate, lump-sum loans will still be available under the HECM Saver program, which pays out a smaller percentage of a home's appraised value than a Standard loan. Because the proceeds are lower, more home equity is available to cover the interest that accumulates over the life of the loan. "The loans don't have the same risk profile," says Peter Bell, president of the National Reverse Mortgage Lenders Association.
A report last summer by the Consumer Financial Protection Bureau noted that the fixed-rate, lump-sum loans were risky for younger seniors with decades of retirement ahead. Over time, the interest due on the loans could devour a considerable amount of home equity. In the past couple of years, these loans accounted for up to 70% of the reverse mortgage market.
The elimination of the Standard lump-sum, fixed-rate loan is part of an effort to shore up the Federal Housing Administration's mortgage insurance fund. Reverse mortgage borrowers never owe more than what their home is worth, even if interest plus principal exceed the home value when the loan comes due. The mortgage insurance fund is on the hook to pay the difference. A borrower pays an upfront fee and an annual premium for government mortgage insurance, which covers any shortfall.