![]() taxpayers-at risk of paying for these activities in the event of a future housing market downturn.įoreclosures: Another program challenge relates to borrowers who used HECMs as loans of last resort when there were no other options available. The use of reverse mortgages to hedge investment portfolios is a perversion of the original intent of the HECM Program and a misuse of FHA insurance that puts the FHA insurance fund-and ultimately, U.S. This trend is unfortunate and goes against the HECM program’s original mission to help borrowers use home equity to help with economic hardships. Likewise, the suggestion that people should take out a loan on their house to obtain a higher Social Security benefit requires an analysis that is dependent on many factors and might not result in a net benefit after loan costs are taken into account. The inherent risk in this strategy is that the asset price recovery must exceed the costs of the loan, which cannot be known in advance. When asset prices recover, they can repay the loan. This way, they do not deplete their investment accounts when asset prices are low. The idea is that if investment values fall, borrowers can use their reverse mortgage line of credit to obtain funds. Specifically, they are sometimes used as a type of investment portfolio hedge when investment values fall or as a means to delay filing for Social Security benefits. More recently, reverse mortgage marketing materials have suggested that wealthy people take out HECMs as an investment strategy. It was originally envisioned as a means to help older homeowners who were “house rich but cash poor” gain access to a portion of their home’s equity. The HECM program has undergone many changes over the years. These loans are also riskier for consumers, as they lack the consumer protections that HECMs offer. Proprietary loans typically have served borrowers with home values exceeding the Federal Housing Administration (FHA) home value limit ($822,375 in 2021). ![]() Very few lenders offer proprietary reverse mortgages, which are not insured by the Federal Housing Administration. ![]() HECMs make up the vast majority of reverse mortgage loans. The number of HECM loans has fallen dramatically in recent years, from a high of nearly 115,000 loans in fiscal year 2009 to 31,272 in fiscal year 2019. It also protects the borrower if the lender cannot make a scheduled payment. This insurance protects the lender if the amount owed on the loan is more than the value of the home when the loan is due at loan termination. Borrowers pay mortgage insurance premiums at origination and on a monthly basis. Private lenders issue HECM loans, which are insured by the Federal Housing Administration. Home equity conversion mortgages: The Department of Housing and Urban Development (HUD) administers the federally insured reverse mortgage program known as the Home Equity Conversion Mortgage (HECM) program. ![]() When the loan is due, they owe the lesser of the loan amount or 95 percent of the appraised value of the home. This is known as being a nonrecourse loan. In addition, borrowers are protected when the amount they owe is more than the value of their home. However, to do so, they must act quickly after the borrower's death to meet short Department of Housing and Urban Development deadlines. In some cases, eligible nonborrower spouses may remain in the home after the borrower dies.
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