Refinancing Premium, National Loan Limit, and Long-Term Care Premium Waiver for FHA's HECM Program
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.