As a result of the gaping hole in its finances, the FHA is currently mulling a new reverse mortgage product: the Mini Home Equity Conversion Mortgage (Mini-HECM). The idea was put forward at a recent real estate conference in San Diego, and since then has been echoing around the blogosphere.

The product is still in the early stages of planning, so it’s unclear exactly how it would function. Basically, it is expected to serve as a more compact and economical version of the existing reverse mortgage product. For borrowers that want to receive cash now in one lump sump payment, the Mini-HECM would presumably allow them to withdraw a smaller portion, though at terms more favorable than existing loans offer. The catch could be that borrowers, then, wouldn’t have the option of withdrawing additional funds later.

In this way, the product would conceivably protect both borrowers and the FHA. Borrowers, while not having the luxury of converting the entire (projected) value of their home into equity, would still be able to withdraw a significant portion, though small enough to ensure that they would have remaining equity that they would receive at the time of sale (and repayment). One of the main criticisms of reverse mortgages is that it encourages borrowers to withdraw all of the equity in their homes, leaving them with little in case of emergency. With the Mini-ECM, borrowers would presumably be prevented from exceeding a certain equity threshold, thereby guaranteeing them an equity reserve that could be tapped in desperate circumstances.

The FHA would also be protected, since the likelihood of default would also decrease. Over the last few years, many reverse mortgages have been pushed underwater (i.e. loan size exceed home value) by the bursting of the housing bubble. This explosion in defaults, however, wasn’t anticipated by the FHA, which insures the majority of reverse mortgages, resulting in an $800 million home in the agency’s finances. It has responded by petitioning Congress for funds and lowering the maximum loan size for all reverse mortgage borrower. The Mini-HECM would provide a further layer of protection.

It seems the government (via HUD and the FHA) are finally getting serious about reverse mortgages. The industry is still something of a free-for-all, lacking comprehensive regulation. With this potential new addition the family of reverse mortgage products, the FHA will hopefully ensure that HECMs are provided in a way that primarily benefits the consumer (rather than the lenders), while also minimizing the exposure of taxpayers.

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