Attention Seniors: Reverse Mortgage Rules Are Changing

The Reverse Mortgage Stabilization Act recently passed into law and with bi-partisan support of all things.
It seems that both Democrats and Republicans understand how important the program is to those age 62 and over, and they made sure that, although there are some significant changes being made to HUD’s reverse mortgage program…. and some of those changes will make it more difficult for homeowners to qualify for a reverse mortgage… the program still offers benefits to older borrowers that aren’t available otherwise.

FHA losses drive changes to reverse mortgages…

One of the key benefits of HUD’s Home Equity Conversion Mortgage (“HECM”), which is what the government calls a “reverse mortgage,” is that they are “non-recourse” loans.
That means that at the end of the reverse mortgage (which occurs either upon the death of the last surviving spouse or the sale of the home), if the balance owed on the loan exceeds the home’s value… then the borrower (or borrower’s heirs) can just walk away and owe nothing… with the balance paid by the Federal Housing Administration (“FHA”), who is the insurer of these loans.
To cover this risk of loss at the end of a reverse mortgage, the FHA charges borrowers an annual mortgage insurance premium, which is 1.25 percent of the outstanding loan balance.
Obviously, during the decades of steady home appreciation, at the end of a reverse mortgage there was often still equity in the home and therefore for the most part the owners refinanced or sold the homes… but only a relative few walked away.
However, since home values have fallen fairly dramatically, more and more people have found that at the end of a reverse mortgage, the home’s value was less than the amount owed on the loan… and since they couldn’t refinance… they took advantage of their option to simply walk away… and owe nothing.
So, it shouldn’t be much of a surprise that last Spring, FHA announced that it will incur losses in the years ahead as a result of fallen home prices and its insuring of reverse mortgages. But that doesn’t mean that reverse mortgages are going away, or that they’re not part of a very important government program, and both parties in Congress agree on that point, even if not on much else.
Important changes being made to HUD’s reverse mortgage program… some take effect September 30th.
Some of the changes will result in fewer homeowners able to qualify for reverse mortgages, and certainly the maximum dollar amount that homeowners will be able to access will be reduced. But, overall, the changes are not likely to reduce the demand for reverse mortgages.

1. To begin with, there used to be two types of reverse mortgages… one was called the “standard” and the other the “saver”. Not any more. The new rules make the two into just one.
2. As of Sept. 30, 2013… borrowers will be able to borrow approximately 15 percent less on average than in past years. The new rules say that at a 5 percent interest rate, a 62-year-old can only borrow up to 52.6 percent of a home’s value. Last year, that same 62 year-old could borrow up to 61.9 percent of the value of the home.
3. The amount of money initially taken out by the borrower will now partially determine what the reverse mortgage will cost. Those that want to receive in year one, 60 percent or more of the total available will pay more than those that don’t. The fee is for an initial mortgage insurance premium and if you take more than 60 percent, it’s 2.5 percent of the property’s appraised value.
   Those who take out less than 60 percent only pay 0.5 percent of the property’s value, but either way… it’s not something you have to pay out-of-pocket… you can put whichever amount into the loan. And meanwhile, the “annual mortgage insurance premium,” is still 1.25 percent of the loan balance.
4. The new rules limit year one withdrawals. If a homeowner could withdraw a total of $200,000… then in year one he or she could only take 60 percent of that total during the first year, which would be $120,000.
   There are a few exceptions to this rule that allow borrowers to withdraw an additional 10 percent of the max allowed… and in those instances, if the max allowed were $200,000, that 10 percent bump would allow for an additional $20,000 in year one.
5. QUALIFYING? For the first time ever, lenders will be required to assess a borrower’s ability to pay property taxes and homeowners insurance bills. And in some instances, lenders will require certain borrowers to set aside funds to cover property taxes and insurance in the future. As of Jan. 13, 2014… lenders are to conduct an analysis of all sources of borrower income, including earnings, pensions, Social Security, funds held in IRA and 401(k) accounts, et al… and even credit history can become a factor in some instances.

Lenders are required to consider the amounts the borrower(s) have left after normal living expenses. If a single homeowner can show $500-$600 is left after paying monthly living expenses, he or she will probably not be required to set aside a significant amount of the loan’s proceeds to cover property taxes and insurance in future years. If a lender’s determination is that a borrower may not be able to cover property taxes and insurance in future years, it may require funds to be set aside, or it may arrange for deductions from monthly payments or amounts may be charged to the credit line.

Without question, this aspect of the new rules will hit seniors harder in some parts of the country than in others, such as in areas where homes cost less, thus making property taxes and insurance, relative to the appraised value of the property, higher in percentage terms. Of course, on the positive side of the coin, although it does reduce the amount of cash available through a reverse mortgage, reserving funds to pay property taxes and insurance does eliminate the potential for a home to be lost as a result of failing to pay such costs.

Will there be more changes coming, or is this it?

Some say the FHA is trying to guide borrowers to taking out funds from a reverse mortgage more gradually and over time, instead of all in year one, because it reduces the chances that the borrower will run out of money too soon… and that’s definitely something to consider. But, the new limits on how much can be withdrawn in year one don’t actually slow things down all that much, so it’s unclear just how much of a positive impact will result from the new limitations.
In addition, whether FHA continues to lose money insuring reverse mortgages will surely depend on future home values more than anything else. If property values rise, then FHA’s losses will fall… and if values fall, or stay stagnant then FHA will continue to lose because people will walk away at the end of reverse mortgages leaving FHA to pay off their balance.

So, who knows what changes may come in the future. One sign that more changes are likely to come can be found in the recent legislation that allows HUD to make changes in the future without having to go through Congress. If that’s the case, then homeowners over 62 should plan to take out their reverse mortgage sooner rather than later.

If you get yours before September 28th, you can still qualify under the old rules… and it would be a safe bet that if there are changes next year or the year after, they probably won’t offer homeowners any more than is offered now… chances are changes in the future will mean having to accept a little less.

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