HECM 3.0 — New and Improved
Home Equity Conversion Mortgages (HECMs) have evolved significantly since they were first introduced in 1989. Today they offer senior homeowners a safe and secure strategy for borrowing against their home’s equity.
Since its inception the HECM program has undergone a number of significant changes. Some of these include
· Introduction of the HECM for Purchase which allows homeowners to combine their Reverse Mortgage with the sale of their original home and the purchase of a new home – often a smaller home or one that’s closer to family and friends
· Introduction of mandated HECM counseling which is aimed at providing potential borrowers with an overview of the program from a non-biased source
· Streamlining of the loan’s draw options so that today, all borrowers pay the same insurance premium and receive the same options to draw out their money as a line of credit or monthly payments (the option to draw out the money in one lump sum was eliminated for all borrowers).
Over the last 2 years, however, the HECM program has seen its widest range of policy updates. Lenders believe that it is now entering a “steady period” which views the HECM program as one that has evolved over the course of three phases — before the financial crisis, post-crisis and the “HECM 3.0” of today.
The Barclays bank, which has been conducting a review of the program for the past year, writes that “the new program is different from prior ones in many respects and fixes the weaknesses in the previous programs to make this a more stable product for investors, as well as a better financial risk for the FHA”
In its review, Barclays notes that, prior to the crisis, HECMs were mostly floating rate lines of credit in which prepayment rates were fairly stable, there were few delinquencies and large bank and insurance originators (such as MetLife, Bank of America and Wells Fargo) dominated the scene. Investors acquired HECMs in pool rather than HMBS form.
During the period of financial crisis, reverse mortgage underwriting, was spotlighted as issues of default concerning the fixed-rate full-draw HECM product became more prominent. Once the HUD was granted Congressional authority to modify the program, program criteria was tightened to cut down on loopholes, abuse and losses.
Also during this time smaller lenders entered the market. Big banks exited the market, paving the way for smaller lending institutions to create a more personal and individual product.
The final changes, including the Financial Assessment rule and updates to the non-borrowing spouse policy, mean that most of the adjustments to the HECM program have finally been implemented. Today’s product has been termed “HECM 3.0″ because, the FHA believes, the weaknesses of the old HECM program have been cleared out and a stronger loan products is now in place.
As of October 2015 the most important changes to the Reverse Mortgage program have been completed and the program parameters are now stable. These include:
Potential borrowers will be obligated to demonstrate that they’re “able and willing” to take on a Reverse Mortgage loan. They will be required to submit financial and credit history that demonstrates that they can and will live up to their obligations under the loan, including keeping up property tax payments, insurance payments and home maintenance. If the credit/financial history is unsatisfactory, the lender may create a “set-aside” fund from the HECM’s assets from which these payments will be made.
Non-borrowing spouses can remain in the home after the death of a borrowing spouse when the lender assigns the HECM to HUD. This will defer the foreclosure process for HECM loans The lender can still pursue claim payments if the heir sells the property. Alternately, the lender can foreclose on the property and then file an insurance claim under the FHA insurance contract.