The FHA is currently mulling a new reverse mortgage product, which has been nicknamed by industry insiders as HECM Lite.

For all intents and purposes, the HECM Lite will be identical to the existing Home Equity Conversion Mortgage (HECM), with two key differences. First, the maximum borrowing amount would be significantly smaller compared to the HECM. Second, there would be no upfront mortgage insurance premium, but only an annual premium of perhaps 1.25%. In a nutshell, there would be less money distributed to borrowers and less risk for the lender.

The product is being compared to a home equity loan, in that it will probably appeal to those with small or nonexistent primary mortgage balances and who wish to only tap a small portion of their home equity. In fact, the only discernible difference between between the two is that a home equity loan amortizes normally, while a reverse mortgage (HECM Lite in this case) is negatively amortizing, and carries no duration. In practice, borrowers might also find that the HECM lite is more reliable than a Home Equity Line of Credit, which can be cut by the lender without warning at any time.

As I alluded to in the title of this post, it is expected that the HECM Lite will fulfill two ends. First, it should help to alleviate the financial problems of the FHA. Due to declining home values, high borrowing amounts, and (in hindsight) inadequate insurance premiums, the reverse mortgage program is currently underwater. It is anticipated that by reducing borrowing amounts while maintaining the annual insurance premium will result in lower risk and stable profits for the HECM program, so that it continue to sustain itself without the need for a government cash infusion.

Second, it is hoped that the HECM Lite will appeal to a class of borrowers for whom the existing HECM is unattractive. As FHA insurance premiums rise, criticism will once again mount that the HECM is uneconomical for many, if not most borrowers. As a result of this new product, however, those who wish to borrow comparatively modest amounts and are consequently unlikely to default, will be able to do so at a comparatively reasonable cost.

Ultimately, the HECM Lite is still in the gestation phase, and its not clear when, or even if it will be introduced (though a tentative roll-out date of October 10 has been put forward) . Also, the fact that there is no upfront insurance premium might make it less attractive for lenders, which might try to compensate by raising the origination fees. Still, there is consensus that the HECM lite is a step in the right direction, both in increasing consumer choice and in alleviating the FHA’s fiscal problems.

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