The Federal Housing Administration will reduce equity payout percentages in order to stem huge taxpayer losses.

Reverse mortgages, often criticized for having high fees and various anti-consumer features, are actually turning out to be the opposite. They’ve proved that they can be good deals – so much that the government is nearly $3 billion in the hole on outstanding mortgages. As a result, the Federal Housing Administration (FHA) has unveiled sharp curbs on its loan product, called the Home Equity Conversion Mortgage (HECM).

Consumers Should Take A Closer Look

Consumers will need to take a close look at the terms of these loans because now when consumers take out a reverse mortgage they will actually have smaller access to their home’s equity.

In addition, lenders will most likely be required to set aside a portion of the borrower’s home equity in order to pay future property taxes and home-insurance premiums. There may also be limits that restrict borrowers with less wealth from taking out a HECM.

Standard HECM Loan Halted

The FHA and taxpayers have been losing the most money on the most popular HECM loan, which is a fixed-rate loan known as a “Standard HECM” loan. It often carries steep insurance fees and other charges, but pays out a higher percentage of a homeowner’s equity.

With the fixed-rate Standard HECM loan borrowers tend to take all their funds out immediately, in a lump sum causing them to often fall behind on property taxes and home-insurance premiums, as well as deplete any remaining equity in the home, thus exposing the lenders to growing losses.

HECM Saver

Under the new rules the Standard HECM loan will be halted. Because of this most borrowers will be required to consider the newer reverse mortgage called the HECM Saver. The Saver charges nearly no insurance fees, making it less costly to consumers.