At the end of last month, US News and a handful of other media outlets reported that the FHA was in the final stages of releasing a new reverse product. Known as the HECM “Saver,” the new product would be cheaper than its predecessor, but would be offset by smaller principal limits. The news was roundly met with enthusiasm and support.

The only problem is that neither HUD nor its subsidiary FHA ever formally announced any plans for the HECM Saver. The same goes for the National Reverse Mortgage Lenders Association (NRMLA), to which some of the rumors have been falsely attributed. To be sure, representatives from government agencies and private industry have discussed the possibility of such a product from time to time, but it remains in gestation.

Media excitement over the HECM Saver is understandable. One of the main criticisms of the existing HECM reverse mortgage is that it is too expensive. However, the FHA fairly points out that the insurance premiums which make the product expensive are necessary to offset the risk of home-price depreciation and ultimately, default. Thus, the upfront mortgage insurance premium will be a token .01% of the loan amount, with an annual insurance premium of 1.25%. However, HECM borrowers can expect to receive 10-18% less than borrowers who use the conventional HECM. It is intended that HECM Saver borrowers will withdraw all of the proceeds upfront and that interest will accrue at a fixed rate.

Speaking of which, this product will be renamed the HECM Standard and will be revamped slightly. The upfront mortgage insurance premium will be 2%, and the annual premium is slated to rise from .5% to 1.25%. Principal limits will probably remain at current levels (having been slashed already), and interest rates might be higher to compensate for the added risk.

By segmenting the HECM into two different products, the FHA is effectively acknowledging that there is a much higher risk associated with allowing borrowers to borrow against larger proportions of home equity. Since the mortgages are secured by the properties, as long as one’s home equity remains positive, the lender assumes no risk. With larger loans, however, the possibility of a reverse mortgage depreciating into negative equity territory (and consequently, foreclosure) is much higher, a risk that should be reflected in the terms of the loan.

It’s unclear when the HECM Saver will be released, but when it does, it will be probably be marked by a large-scale roll-out by lenders. According to the HUD website, “Changes to support Sponsored Originators, Loan Officers, and HECM Saver” are scheduled to be implemented on October 4, 2010. We’ll keep you posted.

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