In a post that now looks prescient, I reported recently on the FHA’s Financial Troubles (“How will the FHA’s Financial Troubles Affect Reverse Mortgage Lending?“) and wondered aloud about the potential impact on the reverse mortgage industry (which wouldn’t be possible in its current form without the “largesse” of the FHA).

It’s no longer necessary to speculate, as the latest rumors are that the FHA is set to announce new limits on reverse mortgage lending after Thanksgiving. Specifically, the FHA will adjust downward the loan maximums that eligible reverse mortgage borrowers can obtain. This would be the second such “haircut” this year, the other being a 10% across-the-board reduction that went into effect on October 1.

Of course, it’s impossible to know whether this cut – which would presumably not take effect until January 1 – would be as deep. Loan maximums are calculated on a sliding scale that takes into account the age of the borrower and the interest rate on the loan. This quotients (found in this table) are then multiplied by the value of the one’s home to determine how much can be withdrawn upfront. In all likelihood, then, this round of cuts will affect younger borrowers more, since there is greater uncertainty attached to lending to them.

Given the severity of the FHA’s financial troubles, its goal is to minimize uncertainty going forward. HUD Secretary Shaun Donovan has all but promised Congress that under a worst-case-scenario, the FHA will still not require a bailout. Thus, it’s incumbent upon him and the FHA to make sure that there are no surprises going forward – that whatever happens in reality is no worse then their most extreme forecasts.

It’s impossible to offer concrete advice in the context of this development. Those contemplating reverse mortgages will surely feel some pressure to obtain one before the new loan maximums (if indeed a reduction takes place) go into effect. At the same time, obtaining a reverse mortgage is not a light decision. The upfront costs and steady erosion of home equity are serious downsides which must be weighed against receiving a one-way stream of “free” money from a reverse mortgage lender.

In fact, there is no inherent disadvantage of a reduced loan amount, since any part of your home that you don’t borrow against is naturally retained by you in the form of equity. It could even be argued that he FHA is doing borrowers a favor by forcing them to set aside a small chunk of home equity that they can tap into if need be. Industry lobbyists claim that lower loan maximums limit the pool of eligible borrowers, many of whom have pre-existing liens and very little equity in their homes. If you think you fall in this category of borrowers, you may have to hurry if you want to qualify for a reverse mortgage. For everyone else, I would advise against making a rash decision.

One Response to “FHA Set to Impose New Limits on Reverse Mortgages”

  1. Hattie Says:

    For the many seniors who still have mortgages that they can no longer pay, or pay with great difficulty due to illness or the loss of a deceased spouse’s retirement income (or other reasons), this cut can mean the difference between staying in their home and foreclosure. And selling their home in this market is not a practical alternative, if doable at all.

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