The reverse mortgage rumor mills had been buzzing for months, and on October 4, the FHA finally unveiled its new Home Equity Conversion Mortgage (HECM) Saver product.

The HECM Saver is designed to solve two problems: the high costs of obtaining a reverse mortgage, and the potential insolvency of the FHA. In addressing the first issue, the HECM Saver can be obtained without an upfront insurance premium (actually it was reduced to .01% of the principal). To compensate, borrowers will be assessed a larger annual insurance premium (1.25%, compared to the former .5%), which will provide the FHA with ample reserves in the event of default.

The HECM Saver will feature principal limits that are 10-18% lower (depending on borrower age and prevailing interest rates) than the HECM Standard. Its redesign will probably make it more attractive to borrowers with shorter time frames. Previously, one had to worry about keeping a reverse mortgage for a certain number of years in order to rationalize the high upfront costs. Now, these costs will be limited to origination fees and the Service Fee Set Aside (SFSA), which some lenders are waiving or lowering anyway. For better or worse, this means that borrowers can now obtain (smaller) reverse mortgages concern for their time horizons.

The HECM Standard will change as follows: the initial insurance premium will be raised from 1.25% to 2%, and the annual insurance premium will be hiked from .5% to 1.25%, in line with the HECM Saver. However, principal limits will remain at the elevated levels, implemented recently by the FHA in response to complaints. (The current maximum for both HECM products is $625,500).

For those borrowers that have already decided to obtain a reverse mortgage, they must choose between the HECM Saver and the HECM Standard. Due to its lowered costs, the HECM Saver is obviously preferable. Those that have higher borrowing needs (due to an existing primary mortgage or for other reasons) may have no choice but to obtain an HECM Standard and compensate the FHA for the added risk by paying a 2% upfront mortgage insurance premium.

Speaking of the FHA, this news is certainly good for the organization, and by extension, for taxpayers. It makes it less likely that the FHA will require a cash infusion and more likely that it will be able to continue operating as a self-sufficient, stand-alone program.

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