Definition and Examples of the Reverse Mortgage Stabilization Act
The 2013 Reverse Mortgage Stabilization Act is a National Housing Act amendment regarding reverse mortgages for those age 62 and older. The act authorizes the Housing and Urban Development (HUD) to institute requirements that keep the reverse mortgage program (Home Equity Conversion Mortgages) stable and consumer friendly. This bipartisan bill signed into law by President Obama allows HUD to regulate HECMs.
The act was needed because reverse mortgages are complicated products aimed at older adults. Without regulation and oversight, seniors could wind up in a loan program that is not in their best interest. With the act, the FHA (overseen by HUD) has the power to closely monitor and make quick changes to the program to protect the program’s integrity and in turn, protect consumers.
- Alternate name: reverse mortgage reform bill
One recent example of the Stabilization Act in action took place in 2021. The FHA used its authority to allow mortgage lenders to set adjustable interest rates for HECMs using a new index rather than the London Interbank Offered Rate (LIBOR) index.
How the Reverse Mortgage Stabilization Act Works
The Reverse Mortgage Stabilization Act protects consumers as well as the FHA. The act was written in response to a 2012 report by the FHA, which found the HECM program’s financial viability was in jeopardy. The FHA commissioner Carol Galante’s stated goal was making the reverse mortgage program a sustainable option for seniors who wished to age in place in their homes.
After the Reverse Mortgage Stabilization Act of 2013 became law, the FHA could make quick adjustments to the program via mortgagee letters, which HECM lenders must adhere to.
The first FHA actions included:
- Revising the mortgage insurance premium and principal limit factors.
- Adding a lump-sum payment option.
- Requiring lenders set aside some loan proceeds for borrowers to pay property tax and insurance.
In the years since the Reverse Mortgage Stabilization Act became law, the FHA has instituted changes to protect consumers and reduce tax and insurance default risks. Many updates have been made to the HECM program since the act was passed. These include:
- 2015: New protections for non-borrowing spouses under age 62.
- 2017: Lowering the upfront Mortgage Insurance Premium from 2.5% to 2%.
- 2019: Implementing a Collateral Risk Assessment, which could require a second appraisal if the FHA is concerned about a potentially inflated home value.
- 2021: Increasing the maximum loan amount for FHA-insured HECMs to $970,800 for 2022.
What the Reverse Mortgage Stabilization Act Means for Borrowers
When it comes to complex loan products such as reverse mortgages, federal government oversight can help protect consumers from borrowing beyond their means or making uneducated decisions regarding home loans (as with the subprime mortgage crisis in 2008).
The Reverse Mortgage Stabilization Act created standards and limits that lenders must follow and aims to ensure that prospective borrowers get proper counseling before moving forward. It also allows FHA to increase borrowing amounts to account for housing value increases. And during the COVID-19 pandemic, the act allowed the FHA to quickly declare foreclosure and eviction moratoriums.
- The Reverse Mortgage Stabilization Act of 2013 grants authority to the Federal Housing Administration to protect the stability of the Home Equity Conversion Mortgage (HECM) program and consumers.
- The act was bipartisan and signed into law by President Obama.
- The act has been used several times to make changes to the HECM program in the years since.
- The FHA has issued several mortgagee letters requiring lenders to implement various changes to their HECM programs, including increases to the borrowing limits, which index is used to set adjustable rates, and more.
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