New HECM Saver Option

The purpose of the new HECM Saver program is to lower upfront closing costs for senior borrowers who wish to borrow smaller amounts than the maximum loan amount that would otherwise be available to the borrower under the traditional HECM product. ML 10-34 thus coined new product names for the two HECM programs that are available to senior borrowers: HECM Standard and HECM Saver. According to ML 10-34, the two programs must be identified as separate and distinct initial mortgage insurance premium (MIP) options.



In a nutshell, the HECM Saver is a second FHA-insured HECM option that essentially carries no initial MIP. Effective for all HECM case numbers assigned on or after October 4, 2010, senior borrowers may select either a HECM Saver or a HECM Standard option. In addition, ML 10-34 implemented changes in the following areas related to HECM lending: determining initial and monthly MIP; calculating the initial MIP in HECM refinance transactions; setting new reduced HECM principal limit factors and a reduced effective interest rate floor; providing guidance for managing the existing pipeline of HECM loans; and utilizing correct and updated HECM loan documents and disclosures.



All existing program features associated with the HECM Standard are also available under the HECM Saver. This includes all HECM transaction types (traditional, purchase money and refinance); all five payment plans (tenure, term, line of credit, modified tenure and modified term),; adjustable and fixed interest rate features: and all interest rate indices (CMT and LIBOR).



Initial and Monthly Mortgage Insurance Premiums



By statute, all FHA-insured loan programs must provide for an initial MIP.2 As a result, for the HECM Saver, HUD announced that the initial MIP will be 0.01% of the maximum claim amount (or “MCA”), which is collected at the time of loan closing. For an average MCA of $250,000, under the HECM Saver the initial MIP will be $25. For HECM Standard, the initial MIP will continue to be 2% of the MCA, which is also collected at the time of loan closing. Thus, under the HECM Standard, an average MCA of $250,000 will require an initial MIP in the amount of $5,000. The term “maximum claim amount” is defined as the lower of the appraised value, the national mortgage limit, or the sales price for the home (for HECM for purchase loans).



Monthly MIP (the mortgage insurance premium that accrues to the loan and paid monthly to HUD) for both HECM Saver and HECM Standard will be charged at an annual rate of 1.25% of the outstanding loan balance. As a reminder, HUD previously increased the monthly MIP for “traditional” HECM loans (i.e., HECM Standard) from .50% to 1.25 % pursuant pursuant to Mortgagee Letter 2010-28, effective for all case numbers assigned on or after October 4, 2010.

This may be a good option for seniors who are looking for a shorter term loan or preserving equity in their property.