The FHA-insured Home Equity Conversion Mortgage (HECM) is the product of choice for the overwhelming majority of reverse mortgage borrowers. However, the current loan maximum for both the HECM standard and HECM Saver is $625,500, which means that those with more expensive homes must utilize Jumbo loans for their reverse mortgage needs.

Jumbo reverse mortgages are a form of proprietary mortgages, and must necessarily be obtained directly from the lender. On the one hand, the absence of FHA insurance premiums eliminates one of the most significant costs for borrowers. On the other hand, this also removes the main safety feature of reverse mortgages, and besides, lenders will always compensate for the lack of insurance by charging a higher interest rate. They will also require a solid credit history, in order to ensure that borrowers have the means to pay taxes and hazard insurance premiums, as well as to maintain the property, after the reverse mortgage has been originated.

Even though proprietary reverse mortgages are not subject to the same standards as HECM reverse mortgages, they are becoming subject to increasingly stringent regulation. A handful of states have already legislated that all reverse mortgages conform to the same set of standards, including that proprietary mortgages must install the same safeguards to minimize the chance of default. Recent federal guidance, while non-binding, was also aimed at bringing proprietary reverse mortgages up to code.

Prior to the housing market crash, most major reverse mortgage lenders also offered a proprietary Jumbo product. As of November 2010, however, Generation Mortgage is the only such lender. Its Generation Plus Loan “targets owners over age 62 with homes appraising between $500,000 and $6 million,” and “carries a fixed rate of 7.78 or 8.78 percent, depending upon the program. All funds must be taken at closing. A minimum FICO score of 700 is required.” As the mortgage industry normalizes and securitization (in the form of Mortgage Backed Securities) becomes viable, the number of lenders offering proprietary reverse mortgage products should increase.

In addition, pending federal legislation would increase the loan limits in certain regions for all FHA borrowers, perhaps as high as $778,000 in the most expensive markets. In that case, a larger chunk of borrowers would become eligible for HECM reverse mortgages. However, given that it was only recently that the FHA’s dire financial circumstances prompted it to consider cutting limits, it seems unlikely that such legislation will be passed anytime soon. In reality, HECM reverse mortgage limits are just as likely to be lowered (to the former level of $417,000, or even lower) as they are to rise.