As the generation of Baby Boomers age the United States finds itself facing a retirement funds crisis – more and more retirees lack the financial capacity to support themselves during their ever-increasing life spans. Financial advisors are working with these individuals to help them explore ways in which they can stretch their existing income and even find new sources of income to supplement their retirement funds.
One such strategy involves the federally-insured Home Equity Conversion Mortgage (HECM), a reverse-mortgage program in which older homeowners can convert some or all of the equity in their homes into cash. Financial analysts see the HECM product as a well-designed program which allows seniors to draw funds in a variety of ways to meet their needs. The program was launched in 1989 but over the years it has remained small and a relatively small number of seniors have taken advantage of it. Major revisions in the program were initiated over the last 16 months and the HECM program now gives every indication that it is on the verge of significant expansion.
Beginning in the fall of 2012 Congress began to pressure the Department of Housing and Urban Development, the agency overseeing the Reverse Mortgage, to make changes that would make the HECM loan safer, both for the borrowers and for the government, which insures the loans.
Changes included removing the one-time draw option from the list of alternatives that a borrower has to access his/her money, limiting the amount of equity that a borrower can draw and establishing more oversight to ensure that a borrower can and will maintain the loan.
Recently HUD issued new Mortagee Letters to further minimize complexities that have left many senior borrowers confused about their loan, their rights and their obligations. HUD is clamping down on deceptive merchandising providers and is more willing to work with senior rights organizations and agencies to which many seniors look for guidance on financial products. These moves, together with the 2008 requirement that mandates that all HECM borrowers complete a counseling session with a HUD-approved counselor, ensure that the Reverse Mortgage product is stronger and more transparent than ever.
Finally, a new change is scheduled to come into effect on August 4th that may actually increase the amount of cash or monthly payments that a senior can draw under the HECM program. This sum of money that a borrower can access is based on the borrower’s age at the time at which the Reverse Mortgage was taken out — the older the individual, the larger the draw amount. If the property that is being mortgaged under the HECM loan is owned jointly by a married couple and both partners are covered by the HECM, the age of the younger one is used, which lowers the draw amounts.
Up until this month seniors had a choice of including their younger spouses as HECM co-borrowers, or not. If the partner was included the amounts that could be drawn under the Reverse Mortgage were lower. However, the surviving spouse could remain in the house and draw whatever funds were available before the death of the borrowing spouse. Alternatively, the couple could choose to draw larger amounts by leaving the younger spouse off the HECM. If the couple chose that option and the older spouse died first, the surviving spouse was obligated to vacate the property upon the borrowing spouse’s death.
The new rules are designed to protect non-borrowing spouses (NBSs) from being evicted after the HECM borrower dies. Starting on August 4th, if the surviving NBS assumes ownership of the property and meets other obligations of ownership including payment of property taxes, s/he can remain there indefinitely. Additionally, an NBS can be any age when the HECM is taken out, but the younger s/he is, the lower the amount that the HECM borrower can draw.
According to HUD, under this new rule, all spouses will have their tenure protected. If they are 62 or older, they are co-borrowers while if they are younger than 62 they are NBSs with protected tenure.
This is good news for many couples who otherwise wouldn’t take the risk of acquiring a HECM loan. Younger spouses will now have tenure protection — the cost will depend on the age of the NBS. For example, the borrowing power of a senior of 79 years old married to a NBS of 39 will be reduced by 36%. If the NBS is 25 years of age, the reduction becomes 47%. NBSs must be aware that, while their tenure is protected, they will not be able to draw funds under the HECM — only the borrower can do that.