HECM Principal Limit Reduction – October 1’st 2009

The U.S. Department of Housing and Urban Development posted Mortgagee Letter 09-43, which announced a new set of principal limit factors for the Federal Housing Administration (FHA) HECM program. The changes will lower the principal limits for the HECM by 10%.

According to the ML, the new principal limit factors must be used for all HECMs which the FHA case number is assigned on or after October 1, 2009.

All loans for which the FHA case number has already been assigned as of September 30, 2009 may be processed as usual. The lender need not change any of the calculations of principal limit or re-disclose to borrowers any changes in the HECM proceeds that the borrower will receive.

The announcement comes after the National Reverse Mortgage Lenders Association worked directly alongside AARP and FHA about what the industry’s options were. FHA felt that since the appropriations process is unlikely to provide credit subsidy, program changes are the only viable route for keeping the program operating past September 30, said a statement from NRMLA.

Since an appropriations bill hasn’t been passed yet, NRMLA told RMD that an interim measure known as a “continuing resolution” is being brought up in Congress. This will continue the suspension of the authorization cap on the HECM program, allowing HUD to continue insuring HECMs, but provides no credit subsidy.

Therefore, Any potential borrower who may be affected by this decrease and is sitting on the fence should consider proceeding with a reverse mortgage now. Several borrowers may now need to come in with cash to close due to the decrease. An analysis of year-to-date loan volume at some of the major lenders has indicated that a 10% reduction in principal limits would have left approximately 21% of borrowers with proceeds too short to cover their existing indebtedness on their homes. Many counseling companies are increasing staff and office hours to accommodate the potential influx in counseling requests due the short notice given by HUD.

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