Refinancing Premium,National Loan Limit, and
Long-Term Care Premium Waiver for FHA’s HECM Program
(May 2003, 99p.)
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The Home Equity Conversion Mortgage Program (HECM) run by
the Federal Housing Administration (FHA) provides income to
senior homeowners based on the equity in their home. This
program allows elderly homeowners who are “house rich”
but “income poor” to live in their own home as
long as possible. HECM is a form of reverse mortgage in which
the homeowner receives payments from the lender. Before a
loan is initiated, an appraisal determines the value of the
property. The maximum claim amount is the lesser of the local
area loan limit and the appraised value. In order to stay
within the maximum claim amount, a lower principal limit is
set which governs the amount that the homeowner can borrow.
There are five different payment plans which are combinations
of term (fixed payment over set term), line of credit or tenure
(annuity). The principal limit is set according to the payment
plan, age of borrower and current interest rate so that the
outstanding balance is not projected to exceed the maximum
claim amount. The accumulated balance of the loan is paid
when the borrower dies or voluntarily leaves her home and
it is sold. Lenders are paid by an origination fee, monthly
servicing fee and an adjustable interest rate on the loan.
FHA collects an upfront premium of 2 percent of the property
value and an annual premium of 0.5 percent of the current
balance. FHA insures the loan against lender default as a
way of facilitating the reverse mortgage market.
In 2000, HUD completed an evaluation of the HECM Program
entitled, “No Place Like Home: A Report to Congress
on FHA’s Home Equity Conversion Mortgage Program,”
hereafter known as the 2000 HECM Report. The current study
was mandated by Congress in Section 201(a), (c) and (d) of
the American Homeownership and Economic Opportunity Act of
2000 (Pub.L. 106-569, 12/27/2000). This report updates the
actuarial analysis presented in the 2000 HECM Report and examines
the potential impact of three legislated changes to FHA’s
Home Equity Conversion Mortgage Program:
- Replace local loan limits with a single, national loan
limit,
- Reduce the premium for refinancing, and
- Waive the upfront premium for HECMs used exclusively for
the payment of long-term care insurance policies.
The first two changes are analyzed using a simulation model
whereas the third change is analyzed by considering the intersection
of HECM borrowers and Long-Term Care insurance participants.
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