The Federal Housing Administration (FHA), a wholly owned government corporation, was established under the National Housing Act of 1934 to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgages; and to stabilize the mortgage market. FHA was consolidated into the newly established Department of Housing and Urban Development (HUD) in 1965.

With respect to reverse mortgages, the primary role of the FHA is to insure home equity conversion (HECM) mortgages. The FHA determines how much private HECM lenders can lend, based on the homeowners age and home value, and guarantees that lenders will meet their obligations. According to HUD there are three major types of HECM risk that the FHA insures:

Reverse mortgages pose three main sources of collateral risk for the lender, meaning the loan balance may grow to exceed the value of the collateral. First, the borrower may live in the property so long that that the continuing payments to the borrower exceed the value of the home.

Second,interest rates may rise, increasing the interest payments and adding to the debt.

Third, the property value may drop such that the value is less than expected when the loan becomes due. Under the HECM program, the lender is protected from these risks by FHA mortgage insurance.

The mortgage insurance is funded by mortgage insurance premiums paid by borrowers. The
insurance premium has two different components, both of which may be financed: (1) an up-front
premium of two percent of the adjusted property value, and (2) a monthly premium of one-twelfth
of the annual rate of one-half percent of the outstanding principal balance.

Social tagging: HUD Reverse Mortgage

A Few More Related Articles of Interest:

MIP - Mortgage Insurance Premium

Home Equity Conversion Mortgage: The Most Popular Choice For Reverse Mortgages

OFHEO - Office of Federal Housing Enterprise Oversight

Home Equity Conversion Mortgage Policy Changes

HECM - Home Equity Conversion Mortgage