HUD had been discussing a new variation of the Reverse Mortgage program for quite a while and they finally announced some of the particulars. The program, which they have decided to call the HECM Saver, will be a limited version of the regular HECM reverse home loans that HUD has had in place that will now be referred to as the HECM Standard. The new HECM Saver is intended for borrowers who do not intend to borrower the full amount of funds available to them under the HECM Standard program and as a result, will receive lower up-front house loans insurance fees for the lower risk to HUD.

Originally it was thought that the HECM Saver program would be much more popular with fixed rate borrowers since the fixed rate option requires borrowers to take a lump sum distribution of all the funds available to them under the program at funding. Many borrowers who expressed a desire to have a fixed rate but didn’t want all the funds in the past had to either switch to the adjustable rate program, take the money and then pay some back or rethink what to do with the excess funds.

The fixed rate did not allow them to leave the cash in a line of credit, which would not accruing interest on the funds until they actually were borrowed, if ever, by the borrower. With a lump-sum distribution all the cash is borrowed at one time and interest accrues on the entire balance. A smaller amount borrowed means less interest accrued. According to an announcement from the National Reverse Mortgage Lender’s Association, HECM Saver will give the borrower approximately 10-18% less cash than the HECM Standard.

With the recent events of reverse mortgages lenders paying many of the borrowers up-front costs on the fixed rate products, the lowered up-front mortgages insurance premium for the HECM Saver of 1% of the appraised value or HUD Lending Limit (whichever is less) does not appear to be a huge assistance for the borrowers at this time. However, lenders paying this fee for borrowers is a relatively recent development and if things change in the secondary market or in the legislative arenas that changes this back to where borrowers are paying all their own fees, then the 1% reduction can lower borrowers costs by thousands of dollars. And since the HECM Saver can be used with any HECM product, borrowers who know they will not use all their HECM proceeds can elect the HECM Saver for the Line of Credit and monthly payment options as well, saving them thousands of dollars in closing costs on those loans as well making this a nice option for the adjustable rate loans.

Although the upfront premium for the HECM Saver will be reduced to 1% and the HECM Standard program will remain the same at 2%, both programs will see an increase in the amount of the annual premium charged to the borrower to pay for the house loans insurance renewal. The home loans insurance premium for the annual renewal will be increasing from .5% to 1.25% of the unpaid principal balance based on the proposed changes at this time.

There are still some possibilities that these programs may change more than outlined above. The House passed a Bill which has already reduced a credit subsidy in the Obama Budget for the HECM programs. The Senate has their own version of a Bill which would slightly raise the House subsidy, but both are at least $100mm less than the original subsidy contained in the President’s budget. The HECM program was intended to run without subsidy so there is still uncertainty as to whether or not the reverse home loans program will require further cuts.

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