Congress Passes National Reverse Mortgage Loan Limit
Bill aims to help more seniors tap home equity
The Home Equity Conversion Mortgage, or HECM, is insured by the Federal Housing Administration, a part of
the U.S. Department of Housing and Urban Development, and makes up more than 80 percent of all the reverse
mortgages written in the country. The maximum loan limit is pinned to the homeowner's age, home value, and
home location. The location dictates the maximum claim amount, which varies by county. These amounts can
range from $200,160 in rural areas to $335,800 in urban areas.
Last month, the U.S. House of Representatives took a giant step towards eliminating the geographical barrier by
passing the Expanding American Homeownership Act of 2006 (H.R. 5121), which would create a single
national loan limit for the HECM program equal to the conforming Freddie Mac loan limit of $417,000 for
A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their homes,
without having to sell the home, give up title, or take on new monthly mortgage payments. Loan proceeds can
be used for any purpose, and can be taken out as a lump sum, fixed monthly payments, line of credit, or a
combination. The loan amount depends on the borrower's age, current interest rates, and the value and location
of the home.
A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the
repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is
distributed to the borrower or the borrower's estate. A senior's home does not have to be owned free and clear to
qualify for a reverse mortgage. Reverse mortgages are often used to retire existing debt on a home.
The early reverse-mortgage programs got a poor reputation because some were flawed and contained huge
appreciation shares for the lender coupled with big-time upfront fees. Now, with the federal government
insuring a majority of the reverse mortgages with no lender equity shares, the concept has become more
acceptable and recognized by consumers.
The Expanding American Homeownership Act, which passed 415-7, would make other substantial
improvements to the FHA HECM program. The new legislation calls for a "home purchase" option that would
allow people to use a reverse mortgage to purchase newer housing that better suits their needs, plus removing
the volume cap on the number of HECM loans that FHA can insure.
Another part of the bill would require HUD to study the mortgage insurance premiums charged on a HECM
loan. This bill gives the FHA the authority to charge fees based on the borrower's risk of default. Currently, the
FHA charges all borrowers the same 1.5 percent upfront fee and 0.5 percent annual fee for mortgage insurance,
regardless of the borrower's risk of default.
Under current law, the FHA may guarantee a cumulative total of 250,000 such loans. When Congress created
the HECM program in 1988, this 250,000 "cap" was imposed so lawmakers could periodically monitor the
program's performance and costs to the government. Now that the program has a track record, there's no
continuing need for a cap because the HECM program generates sufficient funds to cover its costs through
mortgage insurance premiums paid by borrowers.
207 South Alfred Street Alexandria, VA 22314
Phone 703.549.3400 Fax 703.549.5139 Toll Free 800.232.1219