New HECM rules could reduce defaults by 50% – study

by Ryan Smith19 Jul 2016
Policy changes around the rules governing reverse mortgages are expected to cut default rates in half, according to a new study.

The study, conducted by the Center for Retirement Research at Boston College, looked at the effects of policy changes made between 2013 and 2015. The changes were made to help prevent reverse borrowers from missing insurance and property tax payments, for which they’re still responsible under the rules of a reverse mortgage.

The changes were made after the reverse default rate grew uncomfortably high following the financial crisis, HousingWire reported. In 2013, the default rate hit 10%, according to the study.

To stanch the bleeding, the Department of Housing and Urban Development introduced two major rule changes. The first restricted the amount a borrower could draw as a lump sum in the first year of the mortgage to 60% of the initial principal limit. The second required underwriters to take into account an applicant’s financial situation and credit risk when deciding whether to approve a loan.

“According to the (study’s) analysis, the combined impact of both types of policy changes could reduce property tax and insurance default by as much as 50%,” the study stated.


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