Reverse mortgage borrowers are now further limited in how much equity they can pull out of their homes, particularly in the first year of the loan.
As of October 1, new rules governing the Home Equity Conversion Mortgage insured by the Federal Housing Administration - the nation's most popular reverse mortgage program - specify that the maximum disbursement allowed at loan closing and during the first 12 months of the loan is approximately 60 percent of the available proceeds.
And, as of January 13, 2014, anyone over the age of 62 who wishes to tap the equity in their home without making a payment to repay the debt via a reverse mortgage will now have to show the ability to pay the property taxes and homeowners insurance needed to stay in the home. While seniors have never had to qualify to obtain a HECM, those days will soon be gone as mounting defaults threaten the health of the program.
Charles Coulter, HUD's Deputy Assistant Secretary for Single-Family Housing, said in a conference call that he still believes the HECM is an important product.
"If you look at the demographics of the population and the fact that retirement incomes are going to be strained by the economic downturn and reductions in 401(k)s and defined benefit plans, being able to responsibly tap into your home equity is important and something that we want to provide through FHA," Coulter said. "But we must do so in a way that is structurally different compared to the way it has been done."
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can't owe more than the value of the home.
For years, HECM loan servicers have been asking that a "financial assessment tool" be brought into play so that they could better predict the success rate of reverse mortgages. It would also allow lenders some discretion to reject applicants. That way, they would limit the chances of having to foreclose on senior citizens with limited incomes - a public relations nightmare and financial hardship for all.
Early next year, that assessment tool will be a mandatory part of the program. Some reverse lenders say it is too stringent, will hurt seniors, reduce applications and do nothing to increase the FHA fund. While the typical reverse mortgage runs about seven years, the new guidelines stipulate the homeowner ensure tax and insurance "set asides" for their lifetime. According to critics, criteria are set up to evaluate whether someone can fulfill payments over a long period of time. Simply put, retired couples live on lower incomes.
When a homeowner fails to keep current on property taxes and insurance, HUD directs the loan servicer to foreclose on the home. While mortgage insurance premiums are required on HECMs in the event the senior outlives the value of the home, the mortgage insurance does not cover the inability to pay taxes and insurance.
"They've paid the insurance premiums and other fees," said Jeff Taylor, former head of Wells Fargo's reverse mortgage division. "And now it's like losing their car for not renewing their license plate."
According to Reverse Market Insight, a provider of data and analysis for the reverse mortgage industry, approximately five percent of all HECM borrowers are behind on their taxes and insurance payments. Adding to that problem percentage is the number of "trailing spouses" who remain in the home after one spouse dies - but had never been vested in the reverse mortgage.
Reverse mortgages were never intended to pay off a first and second mortgage for a homeowner with absolutely no other means to pay their taxes and insurance. Reverses were intended to help seniors tap some of the equity in their homes to make lives more comfortable - not set them up for failure.
HUD needs to compromise its reverse mortgage guidelines. And, homeowners need to find a way to enough cash stashed away to pay their taxes (some counties offer deferral programs) and insurance if they expect to stay put. Reverse mortgages were never designed to float all boats.
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