By Paula Aven Gladych
The government has made changes to its Home Equity Conversion Mortgages program hoping it would lower the likelihood that borrowers would default on their mortgages
and ensure the insurance program stayed solvent, according to a research brief by the Center for Retirement Research at Boston College.
The changes were fueled by the mortgage crisis, which hindered retired individuals by reducing their ability to tap into home equity to help pay for health care or monthly bills.
The mortgage crisis put pressure on the government’s program and on the borrowers because declining home prices meant that lenders couldn’t recoup the full amount of the loan when houses were sold, requiring the government to make up the difference, the report said.
Financially troubled borrowers also withdrew much of their money at closing, leaving them with few resources to sustain homeownership, which led to a number of defaults.
To make the HECM program more viable, the government announced three key reforms.
The program now has a single maximum loan amount, based on the borrower’s age and current interest rates. The new maximum is about 10 to 15 percent less than was previously allowed under the program.
Borrowers are now charged 0.5 percent of that amount as the mortgage insurance premium at closing.
The new program also limits homeowners from borrowing more than 60 percent of the maximum loan amount at closing or in the first year after closing. Borrowers can take out more only to cover mandatory obligations, such as paying off an existing mortgage or making repairs required by the lender.
Beginning in January 2014, lenders will be required to assess a prospective borrower’s ability to pay property taxes and homeowner’s insurance premiums. The assessment is based on credit reports and an estimate of the homeowner’s residual income after paying basic expenses.
The government’s HECM program provides government-insured loans on assessed home values up to $625,500. The program insures both the borrower and the lender.
Originally published on BenefitsPro.com