Surviving Spouses of Reverse Mortgage Borrowers File Lawsuit Against HUD

In March 2014 four surviving spouses of FHA-insured Home Equity Conversion Mortgage borrowers filed a lawsuit against the Department of Housing and Urban Development (HUD) In the lawsuit, the plaintiffs claim the Reverse Mortgage loan has caused them undue harm due to a statue that will force them to leave their home.

In this suit the plaintiffs seek relief on the impending foreclosure on their homes. They claim that, because their name had been removed from their home’s title or because they were not named on the title of the home prior to the closing of the Reverse Mortgage loan, and they survived their borrower-spouses, the loans have been closed and they face losing their homes.

Charlie Plunkett of Miami Florida, Clarisa Welte of Temecula California, Roselaine Labonte of Haverhill Massachussets  and Winnie Barlock of Las Vegas Nevada worte, in their class action suit, that they “challenge HUD’s failure to protect them and other surviving spouses of Reverse Mortgage borrowers from foreclosure and displacement, as required by the Reverse Mortgage statute.”

The AARP is representing these plantiffs as they seek relief for themselves as well as those who are similarly affected by the clause in the Reverse Mortgage agreement.

Craig Briskin, an AARP attorney who is representing the plaintiffs, said “The motion is filed under federal law to say whatever relief these folks are getting will be extended to those similarly situated.” Briskin believes that ultimately, the suit could affect thousands of individuals who have faced, or are facing, similar situations.

In the suit the plaintiffs write that “subject j [of the Reverse Mortgage law] means what it says: the loan obligation is deferred until the homeowner’s and the spouse’s deaths.” They claim that the Department of Housing and Urban Development violated federal law by foreclosing on the homes they had shared their late spouses—the reverse mortgage borrowers—even though they themselves were not listed on the home’s title.

The suit follows up on an October 2013 ruling by the Court of Appeals regarding a similar lawsuit in which two surviving spouses contested the HUD’s policy of not allowing surviving spouses to remain in their homes after the death of the borrowing spouse. In that suit the Court of Appeals ruled that the surviving spouses must be protected as homeowners. The plaintiffs sought a declaratory judgment that HUD’s regulation violates federal law and demanded that HUD take steps to protect surviving spouse homeowners as required by law. The Appeals Court judge ruled that HUD must grant relief and identify a “remedy” to the issue, though it’s still not clear what that remedy might involve.

Relating to the previous case, Jean Constantine-Davis, senior attorney with AARP Foundation Litigation said “The decision marks a turning point for surviving spouses such as our clients and ensures that they will receive the protections guaranteed by the law: that they will be able to remain in their homes, despite the loss of their husband or wife” At that time the AARP expressed the belief that the decision will ultimately affect an “untold but substantial number” of similar surviving spouses.

Although HUD now requires that potential borrowers undergo a counseling session with a HUD-approved counselor who will explain and expand on the various issues involved, borrowers who took out their HECM loan before the counseling requirement was introduced in 2009 are still facing uncertainty. The AARP hopes that the new suit will provide relief to spouses who are facing foreclosure due to the HUD’s previous lack of clarity on the issue of spousal involvement in the Reverse Mortgage.

The HECM Reverse Mortgage – For You?

The HECM Reverse Mortgage was introduced in 1989 as a loan that allows senior citizens aged 62 and older to use the equity that they have in their house while they continue to live in the house. The loan is insured by the Federal Housing Administration so regardless of fluctuations in the housing market, the borrower never owes more than the amount of money that he signed for when he took out the loan.

The HECM loan isn’t appropriate for everyone. Financial advisors warn against using a HECM loan to cover daily living expenses. The loan is meant to help seniors augment their existing income – social security, pensions, annuities, 401ks, etc – by providing them with additional monthly income that can help them ease their lives and raise their standard of living to include “extras.”

Borrowers who intend to use the Reverse Mortgage for emergency funds, to pay off debt or to pay off an existing mortgage should request the services of a qualified financial advisor who specializes in senior finances before they sign for the loan. In addition to an individual’s personal accountant or attorney, many senior support organizations provide this service free or charge or for a small fee.

Even before you consult with an advisor, you can do a bit of homework and begin the process of determining whether or not you would benefit from a HECM mortgage. An HECM calculator gives an overview of when and how a HECM loan can offer the financial boost that you may be looking for. By looking at examples of seniors living in different circumstances you can get an idea of what a HECM loan can offer you.

You have three options for drawing funds on a HECM loan: as monthly payments, through a line of credit and as a combination of the monthly payment and line of credit plans. Using the HECM calculator you can find the option or combination of options that best meets your needs. You can then compare the funds that you can draw with the total settlement costs and decide whether the benefits are worth the cost.

For example, Sylvia Arnold has a house worth $400,000. She has paid off her mortgage and has no immediate need for additional funds. Sylvia, however, is concerned that the nest egg on which she relies for her living expenses may become depleted while she is still alive — she worries that she will outlive her money. She wants protection against that contingency. The HECM calculator indicates that Sylvia can obtain a credit line of $233,000 on an adjustable-rate HECM. If she leaves this credit line untouched the line of credit will grow every year at a rate equal to the mortgage insurance premium plus the current interest rate. If Sylvia depletes her nest egg while she is still alive she will be able to begin to draw on her unused line of credit. If the interest rates don’t change the unused line will grow to $848,000 when Sylvia hits 95 while if rates increase in the future, the available line will be even larger. Thus, the ratio of available funds loan costs of $8,200 exceeds the loan costs by 28 to 1 and HECM loan costs will absorb very little of the equity in Sylvia’s house, unless she outlives her assets.

Arthur Lawrence is 65 and his house is worth $200,000. He has a $98,000 mortgage balance but because he is now living on a reduced income he is having difficulty making the mortgage payments. According to the HECM calculator a fixed-rate HECM will allow him to pay off his existing mortgage which will eliminate the payment burden but will leave him nothing for future draws. Arthur will max out at age 65. Arthur might be better off trying to make payments on his existing mortgage for another five years at which time the HECM can put money in his pocket.

Earl and Mary Beardsley have a house that’s worth $400,000. They carry a mortgage balance of $80,000. The HECM calculator indicates that a Reverse Mortgage will allow them to pay off the $80,000 balance and maintain a credit line of $153, 380 on an adjustable-rate HECM. They’ve decided to plan for a monthly draw of $600 which will leave a credit line of $46,000 which will grow every month that it’s not in use. The value of the funds at their disposal is 27 times larger than the settlement costs of $8,200, making a Reverse Mortgage a good financial decision.

Every Reverse Mortgage decision is individual, based on the value of the house, the age of the potential borrowers and the borrower’s financial situation. In addition to the calculator you can receive guidance from the HUD-approved counselor with whom you will meet before signing on any loan agreement.

Baby Boomers look to Reverse Mortgages

The wave of baby boomers who are reaching retirement age has expanded from a trickle to a flood. These individuals are, by and large, well-educated and well-informed. For years they’ve struggle to pay their mortgage, help their own kids with their expenses of college and starting their lives. They’ve built up their 401ks, dealt with medical expenses, repaired the house and how they’re looking forward to enjoying their retirement years in an atmosphere of quiet and security. Unfortunately, for many of these individuals, pension cuts and reductions in other benefits have left them with barely enough income to allow them to live comfortably.

There’s not a lot that retirees can do to boost their income but one option that is suitable for many of these people involves taking out a Reverse Mortgage. The Reverse Mortgage is a loan program that involves taking out a loan based on the equity that the senior holds in his home.

A Reverse Mortgage, also known as a Home Equity Conversion Mortgage, is not without risk.  It is a loan, and as with any loan, there are loan obligations. It’s marketed as a supplement to a senior’s income but in reality, it’s a loan. The difference is that the Reverse Mortgage doesn’t have monthly payments. The loan balance is satisfied when the house is sold after the last surviving person on the deed no longer lives in the house. That’s what makes it so attractive — there are no monthly payments.

Reverse mortgages are specifically designed for borrowers who are 62 and older. Anybody who is on the deed has to be at least 62. If two partners are signed onto a home’s deed but only one partner is 62, the Reverse Mortgage can be issued in that older partner’s name, but the younger partner then takes a risk that if the older partner dies or leaves the house, the loan will become due and the younger partner will be forced to leave the house.

Additionally, just like in the forward mortgage world, no one is going to be able to walk into the offices of a lending institution and take out a loan that’s valued at 100 percent of the value of the home. The amount of equity that the borrower can obtain is based on several factors including the age of the youngest borrower, the value of the property, and the current interest rate. The house does not have to be mortgage free as long as there’s sufficient equity — if there’s still a mortgage on the house, the amount of the Reverse Mortgage must be sufficient to cover the remaining portion of the mortgage that needs to be paid. For instance, if a potential borrower owns a $200,000 home with $50,000 left on the mortgage, he could take out a Reverse Mortgage for approximately $112,000. $50,000 of that loan amount would first go toward paying off his mortgage with the remaining funds available for the borrower to use as he wishes. Many senior homeowners prefer to pay off their mortgage in this way.

Many seniors are reluctant to take out a Reverse Mortgage because they worry that their children will be left with the bill. However, if the borrowers end up owing more than what the home can be sold for at the time of their death or when they leave the home, the FHA insurance makes up the difference. In addition, no deficiency balance is passed along through the estate and the FHA won’t pursue any of the borrower’s assets, such as a savings account or a life insurance payment, to settle a shortfall.  If there’s a balance left over after the lending institution sells the house, the inheritors receive the difference. The lender collects what’s owed on the loan, the principal, any interest and the loan’s closing costs.

Reverse Mortgages are a good move for some seniors but not for everyone. Financial advisers suggest HECM loans for retirees who have enough money to meet their monthly expenses and simply need or want a little extra income every month.



New Tax Incentives for Long-Term Care Planning Include Reverse Mortgages

Long-term care services, which are generally not covered by regular health insurance or by Medicare, can be an expensive proposition for many families. Long term care agencies see that the cost prevents many seniors who need the care from seeking it out. Today however, the government has begun to offer tax relief to people who are paying for long-term care. These tax benefits apply to multiple ways of paying for care which can range from long-term care insurance to reverse mortgages and annuities.

What are the tax benefits of owning long-term care insurance? For the 2014 tax year, federal tax deduction limits for long-term care insurance range from $370 to $4,660, depending on the age of the taxpayer. That’s up from $360 to $4,550 from the 2013 tax year. If you already have a policy, the 2013 limits will still apply for this year’s return, due April 15 2014. If you don’t have a policy, you can set future deductions in motion now, starting with limits for 2014.

Many states also offer incentives for purchasing long term care insurance for state returns. Well over half of the states now offer some form of tax deduction or credit for owning long term care insurance. Insurance agents provide information.

What are the tax benefits of life insurance and annuities that cover long-term care?

1. Some long term care riders convert life insurance or annuity benefits into an long term care benefit that covers care as needed  but most available riders are not tax-qualified. When purchasing long term care insurance, it’s important to find a carrier that does offer tax-qualified LTC riders.

2. The tax benefits for critical illness insurance protects the policy holder in case of a major conditions (such as cancer or dementia) that may lead to the need for long-term care. Premiums for critical care insurance are not currently tax-deductible but the benefits received are tax-free.

3. Reverse mortgage income can be used to pay for long-term care if and when it’s needed. Reverse mortgages are designed with the specific needs of the elderly in mind. The proceeds are tax-free and do not affect the borrower’s social security, Medicare or pension income. Reverse mortgages are available to homeowners who are 62 or older. They are special mortgage loans which are insured by the Federal Housing Administration. Payment on these loans does not become due for as long as the homeowner resides in the house as his primary residence.

4. Organizations may also benefit from long term care tax incentives. Premiums can be one hundred percent tax-deductible to a business because they are not considered income to the employee. When benefits are received, they’re generally tax-free.”

Financial Planning for Seniors

As an individual or couple nears retirement age, senior advocates suggest that the individual(s) seek out a financial planner to help them prepare for their financial future. Retirement involves a new economic reality — pension income is generally reduced as opposed to the previous paycheck income.

Some basic questions for people approaching retirement age:

  • Should you tap your savings? You’ve been saving for your retirement for years, but accessing your savings will reduce available funds in case of an emergency.
  • What additional factors should you factor in? Will you be eligible for Medicare?  Medicaid?  Social Security?  Are you going to see your health insurance premiums go up? What other new costs might you be seeing?
  • Will you be able to help your unemployed/underemployed adult children? Can you help out with grandchildren expenses?
  • Do you have other income possibilities? Part-time work? A cottage industry idea? Is tapping your home’s equity with a Reverse Mortgage a good idea?

Whatever your decisions and options, as you reach retirement age, you need to build a financial plan, both for your own future and for your family’s security.

  1. Review long-term care insurance options. Most seniors don’t purchase long-term care insurance but by the time they need it the policy is prohibitively expensive. Buy long-term care insurance so that you will be able to cope with any eventuality without panic.
  2. Don’t hesitate to use the services of a professional as you plan your future. Talk to a lawyer or a financial advisor that you trust. This adds outside authority to your decisions and opens up possibilities that you might not have considered.
  3. Find out what benefits you are entitled to access? Everyone knows about Social Security and Medicare but you might have additional benefits from your pension package, insurance policy or the state or federal government. In addition, many organizations, stores and services offer special discounts and assistance to seniors. Maximizing your rights can save you significant sums of money and allow you to use your available income for more of your desired expenditures.
  4. Consider a Reverse Mortgage. A Reverse Mortgage, also known as a HECM loan, is one of the most powerful tools that seniors have to increase their available income. When you take out a Reverse Mortgage loan you’ll mortgage your home to a lending institution. You will, however, be able to continue to live in your own home throughout the course of the mortgage as lending institution pays you, in monthly installments or via a line of credit, the payment based on your home’s worth and your age upon accessing the mortgage.

Reverse Mortgages aren’t free. There are costs including upfront fees, lenders’ servicing charges and FHA insurance premiums. You’ll also need to take into account the cost of other annual fees including property taxes, homeowner’s association payments, your homeowner’s insurance payments and home maintenance.

If you decide to access a HECM loan you will need to prove that you have sufficient income, via your Social Security and/or your pension payments, to afford these expenses. The lending institution will review your financial situation and, if it feels that you will not be able to meet these payments,   may mandate a “set-aside” fund that will be deducted from your total draw and will be set aside to meet loan expenses.

Evaluating a Reverse Mortgage

Even the safest and best-advised financial moves have pros and cons and the Reverse Mortgage is no exception. Many seniors are enthralled by the Home Equity Conversion Mortgage (also known as a Reverse Mortgage), a special financing option which is taking the country by storm. While Reverse Mortgage lenders promise that the process of obtaining a Reverse Mortgage is safe and practically risk-free, senior advocates are more cautious. They advise that Reverse Mortgages are a good financial move in specific circumstances but urge retirees to review the HECM terms carefully and negotiate with the lending institution to make sure that the options offer the borrower(s) the best possible return for their money.

What is a Reverse Mortgage?

A reverse mortgage is a type of loan which allows seniors aged 62 and older to access the equity that they hold in their homes without having to pass credit or income requirements. To qualify for a reverse mortgage, an individual must own his or her own home (or have paid off enough of the mortgage that will allow the funds from the loan to cover the remainder of the loan) be at least 62 years old and occupy the home as the principal residence.

How It Works:

In a reverse mortgage, a senior homeowner takes a loan against the principal amount of the home, but does not become obligated to make payments against the loan. Loan funds may be drawn in the form of fixed payments or a line of credit. As the homeowner receives his payments his equity in the home decreases.

The loan payments are not due during the homeowner’s lifetime so the home reverts to the ownership of the lending institution after the homeowner leaves the house or dies. The lending institution then sells the house and recoups the investment.

Why a Reverse Mortgage Might be the Solution for You

  • Reverse Mortgages Provide A Source Of Income – When you take equity out of your home through a HECM loan you can receive your funds via a line of credit or monthly payments. This allows seniors who are living on a fixed income to supplement their existing income and use the additional funds at their discretion.
  • Tax Benefits – The income from a reverse mortgage qualifies as a loan and the proceeds are generally tax free. The income from a Reverse Mortgage is not calculated into an individual’s Social Security or Medicare benefits. It is wise, however, to consult a senior advocacy organization for more specifics about the implications of taking out a reverse mortgage, specifically in relation to Medicaid payments.
  • You Will Never Owe More Than The Home’s Value – Regardless of price fluxes, market changes or real estate booms and busts, you will never owe the lender more than the home is worth. Even if you end up receiving more in payments than the value of the home, as long as you maintain your loan obligations and continue to live in the home, the loan will continue to pay you at the agreed-upon rate.
  • Title Retention – The title to the home remains in your name throughout the course of the loan.

Reverse Mortgage Obligations.

  • Fees – When you take out a Reverse Mortgage you are responsible for the origination fees, closing costs and other third party fees. These fees can equal several percentage points of the home’s value.
  • Counseling Requirement - Loan applicants must participate in a HECM counseling session with a HUD-approved counselor as a pre-requisite to obtaining the loan. This requirement was instituted to make sure the homeowner is fully informed about all the aspects of the Reverse Mortgage loan.
  • Interest Rate – The loan carries an interest rate which must be paid monthly. This rate could rise over the course of the loan.
  • Taxes And Home Owner’s Insurance – Homeowners are responsible for paying homeowner’s insurance and property taxes. Failure to make these payments could lead to foreclosure.

As always, it is advised that you consult a professional tax attorney, estate planner or retirement professional before making a decision about a Reverse Mortgage. Many senior advocacy organizations offer free counseling for potential HECM borrowers and other individuals who are planning their retirement income.



Researching Reverse Mortgage Options Before Signing Up

Recent studies show that the growing pressure on seniors is fueling increasing interest in Home Equity Conversion Mortgages. These mortgages, also known as “Reverse Mortgages” allow seniors aged 62 and older to access some of the equity that they hold in their home and increase their retirement income. Financial advisors have mixed feelings about these Reverse Mortgages. On the one hand, they provide an opportunity for retirees to boost their income but on the other hand, when the loan obligations are taken into account, HECM loans become expensive. Seniors are advised to create a comprehensive financial plan before applying for a HECM loan. In general, financial consultants suggest that seniors who have a family with whom they can live, a sufficient level of low-income assistance or sufficient savings turn to the Reverse Mortgage as only their last option.

Why?

A Home Equity Conversion Mortgage (HECM), also referred to as a “Reverse Mortgage” allows homeowners 62 years and older to convert the home equity into cash. But these loans are not appropriate for all financial situations.

Take Charge America is a nonprofit credit counseling agency which provides financial education, credit counseling and debt management solutions to consumers. It is one of the nonprofit credit and housing counseling agencies which contracts with the government to provide counseling sessions for seniors who are considering a reverse mortgage loan. Mike Sullivan, Take Charge America’s chief education officer, reminds potential borrowers to exercise caution when applying for a Reverse Mortgage. He cautions potential borrowers to remember that the money isn’t free — in exchange for receiving approval for the federally-insured mortgage borrowers must commit to paying the loan’s up front and closing costs and the mortgage’s .5% interest rate. Borrowers must also prepare to maintain the house, stay current on all property tax and homeowner’s insurance payments, or risk default.

Taxes and insurance: When taking out a Home Equity Conversion Mortgage  borrower borrows money against the equity of a home. They are not required to make loan payments but they must still pay property taxes and homeowners insurance. Failure to maintain these payments may put the borrower at risk of foreclosure.

Home maintenance: HECM borrowers are responsible for maintaining their home, including paying their homeowner’s insurance payments. The borrower cannot take out another home equity loan or a second mortgage to cover these obligations or home repairs so the borrower must calculate his/her loan income in a way that ensures that these obligatory payments are covered.

Loan repayment terms: The HECM loan comes due when the borrower dies, sells the home, does not live in the home for 12 consecutive months, fails to maintain the home or fails to pay required property taxes, loan insurance or interest payments. The principal and closing costs are repaid from the proceeds of the sale of the house. If the borrower’s heirs decide not to buy the property the money is paid from the borrower’s estate. Borrowers who plan to move in the near future should look into HECM alternatives because the reverse mortgage loan comes due if the home is no longer the borrower’s primary residence.

Financial Aid: If a borrower is eligible to receive low-income assistance from the federal or state government (such as Medicaid) the income from a HECM loan may disqualify him/her from that assistance. Potential borrowers can contact their local Medicaid representative to ascertain the asset limits for Medicaid. Medicare and Social Security payments are not affected by a reverse mortgage.

Financial Advisors Provide Guidance to HECM Applicants

Reverse mortgages are gaining in popularity. Financial advisors have been noting this trend in recent years as cash-strapped retirees seek ways to keep pace with rising expenses and cope with the decreased value of their retirement savings which depreciated during the recession of 2009.

Reverse mortgages, also known as Home Equity Conversion Mortgages,  allow homeowners age 62 or older to borrow against the equity that they hold in their home. The loan does not need to be repaid until the borrower moves out permanently, sells the property or dies.

In 2012 it became clear to the Department of Housing and Urban Development (HUD), whose Federal Housing Administration (FHA) finances the majority of reverse mortgages, that borrowers were opting to withdraw most or all of their home equity at closing. This left little or nothing for the borrower’s future needs and consequently nearly ten percent of reverse mortgage holders were at risk of foreclosure because they couldn’t pay their loan obligations (insurance, home maintenance and taxes).

For that reason, in 2013, Congress authorized HUD to tighten reverse mortgage requirements. HUD aimed to encourage homeowners to tap their equity more slowly in order to better ensure that the borrowers would be able to afford their loan’s fees and other financial obligations. In the process the HUD strengthened the mortgage insurance fund from which loans are drawn.

Some of the key changes include:

First-year limit. Reverse mortgage borrowers can now withdraw no more than 60% of their total loan during the first year of the loan. Previously borrowers could tap the entire amount on day one but this caused significant difficulties for borrowers with limited means who often didn’t leave themselves enough income to cover the loan’s costs.

The 1st year limit may be waived for specific homeowners (individuals with significant health care expenses or other debts) but those borrowers will have to pay a higher upfront mortgage insurance premium — 2.5% of the home’s appraised value instead of the normal 0.5%.

Payout options. Borrowers can draw out their money as a line of credit or in monthly payments — these sums are based on the home’s equity and the borrower’s age.

Financial assessment. Under the previous HECM rules almost anyone with sizeable home equity could take out a reverse mortgage. Now potential borrowers must first undergo a detailed financial assessment to ensure that they will be able to meet future tax and insurance obligations. Lenders are now required to review the potential borrower’s credit history, analyze all income from earnings, IRAs, pensions, 401(k) plans and Social Security and weigh it against the borrower’s estimated living expenses (including other outstanding debts). If a potential borrower seems as though he might not be able to pay his expenses he may be required to set aside money in a “set aside” fund which can cover future obligations if needed.

Maximum loan amounts. The new HUD regulations reduced the maximum amount of home equity that a borrower can access — on average, 10% to 15% percent less equity than before. Older seniors are able to borrow more. This calculation is based on the youngest party listed on the loan so if a couple signs on the loan, the calculation is made on the basis of the younger partner.

As previously, potential borrowers are required to attend an HUD-approved counseling session before they are allowed to apply for a HECM loan.

Some tips for potential borrowers:

  • Get a second opinion from a financial planner, accountant or lawyer who specializes in elder law to make sure a Reverse Mortgage is a good financial move for the specific situation.
  • Consider combining the Reverse Mortgage with additional options which include refinancing, tapping other assets, loans from family members, downsizing (HECM for Purchase — to use the HECM loan to purchase a smaller home) etc.
  • Shop around since interest rates, fees and other costs vary widely from lender to lender.
  • Plan your finances so that the Reverse Mortgage proceeds will only be used for essential living expenses — not for investments or luxury purchases.

What are Seniors Looking for in a Reverse Mortgage?

Following upheavals in the Reverse Mortgage industry of 2013, financial planners are beginning to re-examine the HECM loan as a component of a client’s financial situation. As these analysts offer their suggestions to retirees who are planning their financial strategies for their senior years they are increasingly advising the inclusion of a Reverse Mortgage loan. Reverse Mortgages — also known as HECM loans — have undergone major changes over the last several years. These changes culminated in 2013 when Congress established a special committee to research the loan and authorize the Department of Housing and Urban Development to make necessary changes that would ensure that the product would continue to be available to senior homeowners in the years to come.

The Home Equity Conversion Mortgage (HECM loan) was introduced in 1989 as a way of allowing homeowners aged 62 and older to access funds based on the equity that they had in their home. This “Reverse Mortgage” paid out the equity as a one-time draw, in monthly payments or as a line of credit (the draw options could be combined). The lending institution then owned the house but didn’t take possession until the homeowner died or left the home for more than 12 months.

The Reverse Mortgage market remained relatively steady until 2008 but Reverse Mortgages increased dramatically following that year’s housing crisis. Prior to the collapse real estate values had been skyrocketing due to low interest rates which meant that homeowners could borrow a higher percentage of their home’s equity. According to an analysis by the Center for Retirement Research, Reverse Mortgages continued to climb through 2009 because “the deteriorating economy forced some people to turn to their home as a source of income.”

This is exactly the type of Reverse Mortgage that financial planners warn against today. They note that, when a HECM loan is obtained as part of an overall retirement financial plan, the borrowers can use the money wisely and even invest the proceeds so that they’ll be able to continue to live comfortably. When an individual takes out a Reverse Mortgage as an emergency stop-gap measure, their financial situation is already precarious and the funds from the mortgage might be quickly used up while the obligations of the loan continue throughout the life of the loan.

So what are senior homeowners looking for today when they consider applying for a Reverse Mortgage?  Financial analysts caution homeowners that they shouldn’t rely on the HECM loan as their major source of income, but should use it to supplement existing income sources. The new Reverse Mortgage guidelines of 2013 help to create such a loan structure by examining a potential borrower’s income sources, credit history and background of loan payments before agreeing to issue the loan.  Although cumbersome, this is also benefits the borrower because, if s/he failed to maintain his/her obligations to the loan (insurance payments, interest payments, home maintenance, etc) the lending institution can foreclose on the loan and the borrower can lose his/her house.

One of the valuable features of the HECM loan is that it offers multiple alternatives for drawing funds which can be used singly or in combination to meet a wide variety of needs. These needs may include eliminating payments on an existing mortgage or credit debt, relocating or helping children financially. The relevant HECM option can be matched to the draw alternatives (monthly payments, a line of credit or a combination of the two draw types) to ensure that the borrower can access his/her funds as needed.

Assets into Income During Retirement Years

People have deep sentimental attachments to their homes, especially as they get older. As individuals age they may express concern about how they’ll be able to navigate living in their own home, both physically and financially. Retirement incomes have been falling over the last decade at a time when health care costs, property taxes and other expenses associated with daily living have been rising.

The desire to age in place is one of the reasons that Reverse Mortgages are an attractive alternative for many people. The Reverse Mortgages — in which an individual aged 62 or older can draw some of the equity that s/he holds in his/her house as cash or as a line of credit — provide much-needed funds for retirees. Converting some of the value that a senior has built up in their home over the years into cash offers an extra element of security for retirement financial planning.

Alicia Munnell, director of the Center for Retirement Research (CRR) at Boston College summarized the program’s advantages. “People don’t save. They are living longer, facing large medical costs. They only thing they can tap is their house,” says

In theory, taking out a Reverse Mortgage makes a lot of sense. A Reverse Mortgage acts like a traditional mortgage, but in reverse. The HECM federally-insured Reverse Mortgage is a loan that uses the value of the property as collateral. But instead of the homeowner making payments to the bank, the bank pays the homeowner — either in a lump sum or via a series of regular payments. The loan does not become due until the homeowner moves from the home or dies.

In turn, the homeowner takes upon him/herself to continue to maintain the home, as well as pay property taxes and home insurance.

The HECM Reverse Mortgage is available to individuals aged 62 and older. The Federal Housing Administration insures the program, so the lender is insured against the risk that the property could be worth less by the time it is sold. At the same time the homeowner is insured against the risk that the lending institution might run into financial difficulty and not be able to continue making its promised payments.

HECM loans have come under scrutiny. Some critics feel that they are expensive loans with high service charges and closing costs. In some cases homeowners who didn’t comply with the loan’s conditions were forced out of their home. To address these shortcomings the Department of Housing and Urban Development, under the direction of Congress, introduced changes to the loan in 2013 to protect homeowners, strengthen the program and ensure that the Reverse Mortgage option will be available to senior homeowners in the years to come.

As of January 2014 lending institutions are obligated to evaluate the borrower’s ability to repay a Reverse Mortgage by examining the potential borrower’s credit reports and performing an income analysis. This process is aimed at determining whether the homeowner can afford to maintain the loan by paying property taxes and homeowner’s insurance and keep the house in good repair.

Munnell notes that reviewing a potential borrower’s finances will give the borrower “a sense of how much money you need to have as a buffer before you can take out these loans.”

Other changes in the revised Reverse Mortgage program include the draw options — borrowers are no longer able to draw more than 60% of their home’s equity (there are exceptions, based on need, but they carry a higher insurance premium cost, from 0.5% to 2.5%).

Financial planners view the new mortgage structure as a positive step for all parties including retirees, lenders and the government. Munnell concludes that reducing the amount of income a borrower can access up front “is a good step forward. You’re more likely to have people in decent shape down the road.” Because fewer defaults are expected with these changes costs are dramatically reduced.”

Reverse Mortgage Outline

There have been so many changes in the Reverse Mortgage loan lately that potential borrowers are more confused than ever. The Reverse Mortgage, sometimes referred to as a Home Equity Conversion Mortgage (HECM) – is still a popular financial fallback for retired senior homeowners who have equity in their homes. However, the new regulations, which were introduced in the spring of 2013 and are expected to continue through 2014, have created a great deal of confusion among borrowers.

Below you’ll find an outline that gives you all of the facts that you’ll need to know as you make your way through the loan process.

Available Equity

The Federal Housing Administration (FHA) has issued new instructions regarding the amount of your home’s equity that you can access through a Reverse Mortgage. In order to determine how much money you can take out through a Reverse Mortgage, you’ll need to calculate the age of the youngest borrower, the appraised value of your home and the current mortgage rate.

Your lender can help you make this determination or you can ask the counselor who you will see as part of your FHA-mandated HECM counseling session. Be certain that you understand the other fees as well including the Mortgage Insurance premiums, the origination and servicing fees and the lender charges. You can roll these costs into the loan amount but this must be specified when you take out the loan.

Payout Alternatives

Your payout alternatives for your Reverse Mortgage include:

  • Fixed monthly payments until you no longer live in the home as a primary residence.
  • A flexible line of credit which enables you to withdraw the amount of money that you need when you wish to withdraw that amount
  • A combination of fixed monthly payments and the credit line. A portion of your funds will be available to you as a line of credit while the remainder will be paid out to you via monthly/yearly payout options.

Borrower Obligations

You will be obligated to continue to pay for your utilities, homeowner’s insurance and home maintenance during the course of the loan. You will also be obligated to pay your real estate taxes and the Reverse Mortgage Interest payments. Failure to uphold any of these obligations may result in foreclosure.

Co-Signees

You might be considering putting only the oldest household member on your Reverse Mortgage. This may seem to make financial sense because the calculation of your funds is partially based on the age of the youngest borrower — the older the youngest borrower, the more money you’ll receive through the Reverse Mortgage.

However, if only one spouse signs on the Reverse Mortgage, the non-signing partner is put at risk of losing the home if the signing borrower dies or has to leave the home. Numerous surviving spouses have lost their home in this manner because,  once the signee dies or leaves the home, the lending institution takes possession of the home and sells the property in order to recoup their investment.

HECM Options

Until April 2013 there were three HECM loan options, the HECM Standard, the HECM Saver and the HECM for Purchase. The Department of Housing and Urban Development decided to combine the Saver and the Standard so one set of fees, interest rates and draw options apply to all borrowers.

The HECM for Purchase continues to be offered to seniors who want to use the proceeds from their home equity to purchase a new home. This is a useful tool for people who want to downsize their home or relocate to be nearer to family. When taking out a HECM for Purchase the borrower immediately reinvests his/her money back into another property. The entire procedure — taking out the Reverse Mortgage and buying a new property — is taken care of together.

Eleven Points to Remember When you Take Out a Reverse Mortgage

There have been so many changes in the FHA-insured HECM loan over the past year that new loan applicants may be feeling confused. If you’re considering a reverse mortgage, some of the most important aspects of the loan include:

1. You have two loan options, the HECM Standard (a combination of the former HECM Standard and the HECM Saver) and the HECM for Purchase. If you take out the standard HECM loan you can access up to 60% of your home’s equity and draw the money as a line of credit, as monthly payments or as a combination of these two draw options.

If you want to use the proceeds of your HECM loan to purchase a new home you can apply for the HECM for Purchase. This variation enables you to obtain your Reverse Mortgage and purchase a new principal residence with one single transaction.

2. If you hold a HECM loan and need to move to a nursing home or other medical facility your Reverse Mortgage remains applicable for up to 12 months from the time that you left your home. If you are no longer living in your home after 12 months the lending institution will be empowered to take possession of the home and sell it to recoup its investment.

3. When you sign on your Reverse Mortgage you are obligating yourself to maintain your property, pay your property taxes, keep your homeowner’s insurance current and pay the lenders’ origination fee, mortgage insurance premium and other HECM closing costs. If you don’t meet these loan obligations your Reverse Mortgage may become due and payable.

4. There are various lender servicing fees that are charged during the term of the mortgage to compensate the lender for its loan maintenance.

5. The amount you owe on a HECM loan grows over time. Interest is charged on your outstanding balance and is then added to the amount you owe each month. Therefore, the total debt increases as the loan funds are advanced and interest on the loan accrues.

6. Reverse mortgages use up all or some of the equity in your home. This leaves fewer assets for your heirs. On the other hand neither you nor your heirs will ever owe more than the value of the home when the loan becomes due. If you or your heirs want to retain ownership of the home the loan must be repaid in full – even if the loan balance is greater than the value of the home.

7.  Because you retain title to your home, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other home expenses throughout the life of the loan. If you don’t pay property taxes, carry homeowner’s insurance, or maintain the condition of your home, your loan may become due and payable.

8.  Interest on HECM loans is not deductible on income tax returns until the loan is paid off, either in part or in total.

9. Proprietary reverse mortgages (private Reverse Mortgages) may allow you to borrow more of your home’s equity but these loans carry higher costs. To compare a HECM and a proprietary loan, do a side-by-side comparison of each loan’s costs and benefits.

10. You have the right to cancel a Reverse Mortgage without penalty within three business days after the loan’s closing. To cancel, notify the lender in writing via certified mail (ask for a return receipt). Keep copies of your correspondence. After you cancel, the lender must return any money you’ve paid within 20 days.

11. Reverse mortgage loan proceeds are not taxable. Your Reverse Mortgage payments don’t affect your Medicare or Social Security benefits. When you take out a Reverse Mortgage you retain the title to the home. When you or your partner die, sell the house or no longer live in the house as a principal residence, the loan becomes due and needs to be repaid. This occurs when the lending institution takes possession of the house and sells it.

Thinking About a HECM Loan? Ask the Right Questions!

If you’re planning on applying for a Reverse Mortgage in the near future, you can prepare yourself by reviewing some preliminary information about HECM loans.

The HECM Reverse Mortgage is a federally-insured mortgage that allows you to mortgage your home to a lending institution, access up to 60% of your home’s equity and continue to live in the home.

HECM loans are administered by the Federal Housing Authority (FHA). The loan has undergone serious changes over the past year but financial analysts believe that the product is now stronger than ever.

There are, however, some basic concepts about the loan with which you should familiarize so that, when you’re ready to apply for a Reverse Mortgage, you can ask your lender the right questions that will allow you to ascertain whether the Reverse Mortgage is the right financial move for you.

Types of Reverse Mortgages

Not all Reverse Mortgages are created equally. There are three main types of Reverse Mortgages:

  • Single Purpose Reverse Mortgages are offered by some non-profit organizations as well as by state and local government agencies
  • The Federally-insured Reverse Mortgage is known as the Home Equity Conversion Mortgage (HECM). It is administered and insured by the Department of Housing and Urban Development via the FHA.
  • Proprietary Reverse Mortgages are private loans that are backed by the companies that develop them

When you speak to your lender, be sure that you are both speaking about the type of Reverse Mortgage that fits your needs. Single-purpose Reverse Mortgages are the least expensive loan alternative but they are not available everywhere. They can be used for only the purpose which is specified by the government or nonprofit lender. For example, the lender might specify that the loan may be used only to pay for home repairs, home improvements, or property taxes. These types of Reverse Mortgages are most frequently acquired by homeowners with low or moderate incomes.

HECMs and Proprietary Reverse Mortgages are generally more expensive than traditional home loans and carry high upfront costs. However, these loans are widely available and have no income or medical requirements. Most importantly, you can use the income from a HECM loan for any purpose.

Draw Options

You might be hoping to take the proceeds from your Reverse Mortgage and take a cruise, buy a new car or even help your kids out a bit. However,  if you’re planning on taking out the HECM loan you’ll need to aim lower. The HECM loan limits you to drawing your proceeds as a line of credit or as equal monthly payments. The amount that you’re able to draw each month is dependent on your age at the time of the loan. If you’re in your early to mid-60s, you’ll have access to smaller monthly draws because it’s assumed that you’ll be drawing your money over a longer period of time.  There are some circumstances under which you would be allowed a higher initial draw — health expenses or other debts — but you shouldn’t count on receiving approval. Instead, look at your Reverse Mortgage as a component of your financial planning for your senior years. Financial planners suggest that seniors who incorporate a HECM loan as part of their total retirement package planning will make the best use of the Reverse Mortgage tool.

Your draw options include:

  • a “term” option – fixed monthly cash advances for a specific time.
  • a “tenure” option – fixed monthly cash advances for as long as you live in your home.
  • a line of credit that lets you draw down the loan proceeds at any time in amounts you choose until you have used up the line of credit.
  • a combination of monthly payments and a line of credit.

Reverse Mortgages Finish 2013 With a Bang

The year 2013 saw the Home Equity Conversion Mortgage (HECM) go through numerous changes — the most wide-ranging and comprehensive changes that the product has seen since it was introduced in 1989.  At the beginning of 2013 the Department of Housing and Urban Development, the Federal Housing Authority and Congress were reeling from a 2013 auditor’s report which indicated that the HECM was one of the major causes of a 16.3 billion dollar shortfall in the FHA’s insurance fund.  The shortfall occurred, industry analysts say, because of a loan structure that presented too many possibilities for foreclosure.

Congress and the Obama Administration acted quickly to give HUD the authority that it needed to revise the loan’s terms and structure. These changes included combining the HECM Standard and the HECM Saver into one loan product, reducing the amount of equity that a borrow could access through the loan and removing the one-time draw option that allowed borrowers to access all of their loan’s capital at once.

Analysts are already seeing a stronger Reverse Mortgage. The Reverse Mortgage volume has dropped in response to the extensive program changes but endorsements are expected to grow as the population in the United States ages. The volume of FHA-guaranteed HECM endorsements grew from fiscal year 2012 to 2013, and while it is projected to drop nearly 11% in 2014 as a result of the restructure, the steps taken to strengthen the product ensure that it will remain an option for seniors to add to their financial portfolios for many years to come. .

The 2013 actuarial review of the HECM Fund undertaken by the Integrated Financial Engineering notes that “The initial disbursement limitation and reduction of [principal limit factors] for the FY 2014 introduced new program are likely to decrease HECM demand compared with future volume projected in 2012 review.”

Senior advocates are also applauding the HUD December 2013 announcement of a delay in the implementation of the financial assessment requirement.

Mortgagee Letter 2013-45 states that HUD will delay the effective date for the financial assessment requirement for new HECM case numbers that are assigned on or after January 13, 2014.

The financial assessment requirement was one of the changes that was made in the loan structure. It was created to ensure that loan applicants would be willing and able to meet their loan requirements of home upkeep, property tax payments, insurance payments and loan interest payments. Senior advocates have been concerned that the structure of the financial requirements would place an undue burden on low-income seniors.

No new date for when the financial assessment will in instituted has yet been announced but it’s expected that the new guidelines for the financial assessment will be inaugurated within three months. Senior advocates hope that their input will be considered when creating the final guidelines.

Cristina Martin-Firvida, Director Financial Security & Consumer Affairs, for AARP’s State and National Group expressed the AARP’s position. “… we also recognize that these changes have been made to improve the viability of the HECM program, which we support. The future of the HECM program depends on striking a balance between responsible lending and access to credit. We will closely monitor the implementation and impact of these changes and will continue to advocate for changes that promote the fundamental goals of the HECM program for future borrowers.”

Reverse Mortgage Round-Up of 2013

Not since the Reverse Mortgage was inaugurated in 1989 have there been so many changes to the loan product in one year. During 2013 the HECM loan was completely revamped after Congress gave the Department of Housing and Urban Development the go-ahead to initiate the changes. Financial advisors have been suggesting for several years that specific aspects of the Home Equity Conversion Mortgage would need to be changed in order for the product to continue to serve as a viable loan option for seniors and in 2013, Congress, the Obama Administration and HUD officials concurred, effecting the changes that will allow the Reverse Mortgage to continue to thrive.

At the end of 2012 FHA officials, testifying before Congress, reported that the FHA’s annual report from 2012 showed an unprecedented $16.3 billion insurance-fund shortfall.  $2.8 billion of that amount was traced to the portion of the fund that administers the Reverse Mortgage. Industry analysts determined that this shortfall was due to a loan structure that presented too many possibilities for foreclosure.

While the solution — to restructure the loan in such a way as to reduce the incidences of loan default — seemed clear, HUD officials reminded Congress that they could not effect any changes in the Reverse Mortgage loan structure without Congressional approval. In a highly unusual occurrence a bi-partisian bill which granted the HUD the power to effect needed changes to the Reverse Mortgage passed both Houses of Congress within weeks and was quickly signed into law by President Obama. The changes began to take effect almost immediately and more changes are expected in the beginning of 2014.

On October 1st 2013 FHA eliminated both the standard and the saver HECMs and came out with one product whose borrowing limit wasn’t as high as the former Standard had been but wasn’t as low as the former Saver had been. There are two options, a fixed option and an adjustable option but only borrowers who have mandatory obligations to satisfy (mortgage, other debts, health bills, etc) can obtain the fixed Reverse Mortgage.

Borrowers can now only use 60% of the loan amount for which they qualify during the first year (unless they’re paying off mandatory obligation).  Borrower with mandatory obligations over 60% can obtain more of the amount but can then take only another 10% of the loan for cash out purposes. There is larger mortgage insurance premium charge for going above the 60% threshold.

The goal of these changes is to prevent borrowers with no mortgage or a very small mortgage from taking all of their cash out in the first year, leaving them without sufficient income in subsequent years for living expenses and loan obligations (property tax payments, house upkeep, insurance payments and the loan’s interest payments).

After the beginning of 2014 the FHA is expected to implement an escrow set aside which will safeguard funds for homeowners who have demonstrated that they have had issues paying on time in the past. Early 2014 will also see a financial assessment put into place that will assess a potential borrower’s income and credit history when reviewing the individual’s eligibility for the loan.

Some aspects of the Reverse Mortgage haven’t changed. Borrowers are required to be 62 or older and live in their own home. They must attend a counseling session before applying for the loan in which they will be presented with a full overview of the loan and can hear more about their rights and responsibilities under the terms of the loan.

Reverse Mortgages Renewal

The new HUD Reverse Mortgage guidelines have given the HECM loan new opportunities to reach its fullest potential. Until recently uncertainty over the differences between a HECM Saver and a HECM Standard, worries about spousal rights in the event that a borrower dies, fears of high third party costs and other issues deterred many seniors from taking out a FHA-insured Reverse Mortgage.

New Guidelines

The Reverse Mortgage industry experienced a shock when, in fall 2012, the Federal Housing Administration, the office of the HUD which is responsible for administering the HECM loan, reported that its obligation to cover foreclosed HECM loans had left it with a $5.2 billion shortfall.

Congress determined that the shortfall was caused by loopholes and inconsistencies in the HECM mortgage product. Numerous instances were cited in which lenders were forced to terminate the loan because the borrowers were unable to meet their loan obligations which included maintaining the property, paying house insurance and property tax bills and paying the loan’s insurance payments. Many homeowners had drawn out their loan proceeds in an upfront lump payment and then, subsequently, found themselves without the financial resources to maintain the loan’s payments. Throughout the fall and winter of 2012/2013 HUD and Congress worked to find strategies that would enable the HECM loan to be continued.

A federal oversight regime, the Reverse Mortgage Stability Act, was passed in the spring of 2013 to strengthen the federally-insured Reverse Mortgage, increase confidence in the HECM by both lenders and borrowers and ensure the senior public’s continuing access to Reverse Mortgages.

The Reverse Mortgage Stability Act granted HUD the authority to take necessary steps to prevent future foreclosures. Within weeks of the bill’s signing HUD had published a new list of rules that would shore up the loan and renew interest and confidence in its success. Today, seniors may find it harder to take out a loan and have access to less of their home’s equity but in the long run they will find it to be a more stable product that serves their interests.

Mortgagee Letter 2013-01

Mortgagee Letter 2013-0 gave the FHA the power to secure consumer protection while ensuring the financial viability of the HECM program. Reverse Mortgages had, until then, accounted for less than seven percent of FHA’s portfolio but they were the root of more than 16 percent of the agency’s losses. The changes are wide-sweeping and result in less money for potential borrowers but they translate into more consumer confidence for the product.

Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA) said “The changes should help drive consumer behavior. People will be able to take out the amount they need and leave the line of credit. It will be better for everyone.”

The Consumer Financial Protection Bureau (CFPB) is also involved in effecting changes for the Reverse Mortgage. On area in which the CFPB focuses involves the marketing of reverse mortgages to seniors. Consumer advocates believe that the new level of CFPB oversight will guard senior citizens from practices which may compromise their future financial security. CFPB has, in the past, been at the forefront in advocating for Reverse Mortgage safeguards including mandated counseling sessions for potential borrowers to ensure that they are fully aware of their rights and responsibilities. CFPB oversight is intended to lead to a scenario in which senior borrowers obtain Reverse Mortgages for the loan’s intended purpose of providing the borrowers with a loan that allows them to convert home equity into monthly payments or a line of credit so they can age in place in retirement.

NRMLA’s Bell has noted that, with the new guidelines in place, the Reverse Mortgage product is receiving a increased positive media coverage. “Once it was a loan of last resort for people in financial need. Now, it is being enabled by financial planners for different uses. Jane Bryant Quinn, in her blog, suggested seniors look at it. The Wall Street Journal said that more affluent seniors should look at it, too.”

New Court Case Challenges Court Decision Re: Reverse Mortgage Non-Borrowing Spouse Clause

The Department of Housing and Urban Development (HUD) has appealed a recent court decision regarding the position of non-borrowing spouses in a Reverse Mortgage. The case involved a Washington DC court ruling in a AARP lawsuit regarding a non-borrowing spouse who had his house repossessed after the man’s wife, the borrowing spouse, died.

In 2009 HUD implemented a requirement that obligated prospective HECM loan applicants to attend a counseling session with a HUD approved counselor. At this counseling session the counselor was obligated to explain that, if only one spouse applied for a Reverse Mortgage on a jointly-owned home, the second spouse would be forced to leave the home if the borrowing spouse died or had to leave the home. HUD  ruled that all signees on the house’s deed would have to attend the counseling session to ensure that the terms of the HECM loan were understood by all.

Prior to 2009 however, many couples were unaware of this rule. There were numerous instances in which only one partner had reached the minimum age at which an individual could apply for the Reverse Mortgage and the Reverse Mortgage was granted in that partner’s name, even though both partners were signees on the home’s deed. When the Reverse Mortgage borrower died or was unable to continue to live in the house, the lending institution took possession of the house and the non-borrowing partner was forced to leave the house.

The AARP instigated the campaign that instituted the counseling requirement but there were still many pre-2008 Reverse Mortgage borrowers who were facing the loss of their home when the borrowing partner could no longer live in the home.

In 2012 AARP pushed the issue by challenging the foreclosure on Reverse Mortgage homes which were acquired before the 2009 counseling requirement. The AARP argued that individuals who took out early HECM loans did not obtain the counseling that is given to today’s borrowers and did not fully understood the implications of the loan. AARP asked the court to examine the legality of HUD’s requirement that those individuals be obligated to leave the home if the borrowing spouse dies or leaves the home.

In its court brief the AARP  objected to HUD’s policy of allowing non-relative buyers to purchase the Reverse Mortgage property for the lesser of the reverse mortgage balance. This meant that non-relatives could purchase the home for only 95% of the home’s current value. HUD reversed that rule in response to AARP pressure but a U.S. Appeals Court allowed the second part of the case, challenging to the practice of displacing surviving spouses based on a Federal Law that prohibits displacements of a surviving spouse, to proceed.

The AARP’s present case revolves around Robert Bennett. Bennett did not sign onto the Reverse Mortgage that his wife took out on their joint home in 2008. Bennett’s wife died suddenly and Bennett was approached by the lending institution which notified him that he would need to either pay back the loan or leave the house.

Bennett’s wife’s loan was processed before the new counseling regulations came into effect and neither Bennett nor his wife were aware that, if one of them died, the other spouse would be required to pay back the full balance of the loan or leave the property.

The Appeals Court returned the case to the lower court which, in October 2013, issued its decision that the practice of displacement violates Federal law. In December 2013 HUD Secretary Shaun Donovan filed a notice of appeal, claiming that HUD did not violate federal law by not protecting surviving, non-borrowing spouses of reverse mortgage borrowers.

AARP welcomed the original October court decision. AARP stated that it was hopeful HUD would “act quickly” to implement new borrower protections as a result. The AARP now plans to continue to pursue the case and force HUD to protect non-borrowing spouses.

Things to Remember When You’re Applying for a Reverse Mortgage

For retirees 62 or older, taking a Reverse Mortgage may be a wise financial move. A Reverse Mortgage can help finance a home improvement, pay off a current mortgage, supplement retirement income, pay for healthcare expenses or help the borrower move to a home that is in keeping with his/her new needs. Reverse Mortgages allow the borrower to convert part of the equity in his home into cash without having to pay additional monthly bills or sell the home.

Whereas in a “regular” mortgage the borrower makes monthly payments to a lending institution, in a “reverse” mortgage the borrower receives money from the lender and doesn’t have to pay it back for as long as she lives in your home. The reverse mortgage is repaid when the home is sold, the borrower dies or when the home is no longer the borrower’s primary residence. Proceeds of a reverse mortgage are tax-free and are not restricted by income.

Federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) are backed by the U. S. Department of Housing and Urban Development (HUD). They may be more expensive than a traditional home loan and the upfront costs can be high. If a potential borrower is planning to stay in his home for just a short time or borrow a small amount, a HECM loan may not be the best course of action, but for seniors who are looking for a long-term income source, the federally-insured Reverse Mortgage offers a strong and safe product. There are no income or medical requirements for a HECM loan and the proceeds from the loan can be used for any purpose.

Before applying for a HECM a potential borrower must meet with a counselor from an independent government-approved housing counseling agency. The counselor will explain the loan’s costs and financial implications and will help the calculate the expected revenue from the loan. A list of HUD-approved counselors is available through the agency at 1-800-569-4287. Counseling agencies generally charge around $125 for their services but a number of community housing programs offer the service for a reduced rate or even for free.

The loan applicant’s age, the appraised value of the home and the current interest rate determine the amount of money that a HECM loan will be worth. In general, the older the borrower is, the more equity s/he has in the home and the less s/he owes on it, the more money s/he can access through the loan.

There are several HECM payment options including

  • a “term” option  of fixed monthly cash advances for a specific time.
  • a “tenure” option of fixed monthly cash advances for as long as the borrower lives in the home.
  • a line of credit that lets the borrower draw loan proceeds at any time in amounts of his choosing until he has used up the line of credit.
  • a combination of a line of credit and monthly payments

Some important points about Reverse Mortgages

  • Reverse mortgage loan advances are not taxable and don’t affect  Social Security or Medicare benefits.
  • The borrower retains the title to her home. There are no monthly repayments.
  • The loan must be repaid when the last surviving borrower sells the home, dies or no longer lives in the home as a principal residence. A borrower can be absent from the home for up to 12 consecutive months before the lending institution takes possession of the home to sell it and recoup its investment
  • Origination fees for HECM reverse mortgages are dictated by law.
  • The amount owed on a reverse mortgage grows over time. Interest is charged on the outstanding balance and is then added to the amount owed each month. That means the total debt increases as the loan funds are advanced and interest on the loan accrues.
  • The borrower cannot owe more than the value of the home when the loan becomes due and the home is sold. If the borrower or the borrower’s heirs want to retain ownership of the home the loan must be repaid in full, even if the loan balance is greater than the value of the home.
  • The borrower is responsible for property taxes, homeowner’s insurance, utilities,  home maintenance, and other expenses. If these obligations aren’t met the loan may become due and payable.

Interest on a reverse mortgages is not deductible on income tax until the loan is paid off in part or whole.

New Consumer Financial Protection Bureau Tools for Reverse Mortgage Borrowers

The Consumer Financial Protection Bureau’s new mortgage rules are scheduled to be implemented in January 2014. To help consumers navigate these new rules the CFPB has launched a new tool that will help potential borrowers find local housing agencies that can answer their questions or address any of their concerns.

According to the rules of the Home Equity Insurance Mortgage borrowers must attend a counseling session with an approved HUD counselor before they submit their loan application. At this counseling session the counselor will provide the borrowers with all the information that they need to apply for the loan and see it through. The counselor will discuss the pros and the cons of the loan, give information about the amount of equity that the borrower will be eligible to obtain through the loan, review the borrower’s obligations under the terms of the loan and assist the borrower to calculate whether taking a Reverse Mortgage at a particular time will be to the borrower’s advantage.

Housing counseling agencies frequently offer Reverse Mortgage counseling (as well as counseling about other types of mortgages) for free or at prices which are significantly reduced from what is available through a commercial counseling agency. According to the Reverse Mortgage regulations a potential borrower must attend a counseling session and receive a certificate that attests to his knowledge and understanding of the basics of the loan before he applies for the loan. If more than one person is signed onto the home’s deed both partners must attend the counseling session.

The bureau also published a guide for lenders that presents lending institutions with a clear overview of how to provide mortgage applicants with a list of local homeownership counseling organizations. Lending institutions must provide the potential borrower with a list of local counseling resources and allow the individual to choose his or her own counselor. Counseling agencies are forbidden from having any relationship with a lending institution which would cause the lender to refer a potential borrower to one agency or counselor over another.

CFPB Director Richard Cordray explained the CFPB’s rationale in producing the guide. “Consumers need and deserve the best guidance when making the decision to purchase a home. Buying a home may easily be the largest investment a consumer makes, and we want to make it easier for them to find a housing counselor that is a good fit for them.”

The tool has a search box and a mapping function which allow consumers to view the ten nearest counseling agencies to their zip code. The search function also provides contact information for Department of Housing and Urban Development-approved counselors and delineates the various services offered by the agencies — in addition to reverse mortgage counseling the counseling services may also offer rental housing counseling and default resolution counseling.

The Dodd-Frank Act requires lenders to provide reverse mortgage consumers with a list of homeownership counseling organizations from which they can choose their preferred counselor. Consumers should receive that list soon after applying for a mortgage so they know where to go if they need help to decide what kind of loan to get. Providing potential borrowers with the CFPB list fulfills the regulation.

If a lenders chooses to build its own list the CFPB also provides guidance for creating such a list. The bureau acknowledged that a lender may be unable to provide the lists in time for the January 10, 2014 deadline. In such a situation the lender should direct the potential borrower to the CFPB’s tool.

New Reverse Mortgage Law — Challenges and Benefits

The Reverse Mortgage industry is now completing its second month of the new rules and regulations for the Home Equity Conversion Mortgage loan. Many of the issues and concerns which arose when the new Reverse Mortgage product was introduced are being clarified as the process begins to smooth itself out. One thing that is clear is that, although there are a number of new challenges to the new Home Equity Conversion Mortgage loan, there are multiple advantages as well. The National Reverse Mortgage Lenders Association has declared that they are satisfied with the new loan product which, they believe, will strengthen the industry and provide a needed loan option to seniors.

The new Reverse Mortgage was launched in September 2013. The original program was revamped when the Department of Housing and Urban Development (HUD) tightened the requirements on reverse mortgage loans to help to strengthen the financial stability of the program. The Federal Housing Administration (FHA) reduced the amount of equity that homeowners can access when they get a reverse mortgage and limited the amount of money they can take out during the first year.

A Reverse Mortgage allows homeowners aged 62 years or older to get a loan based on the equity that they hold in their home without having to make monthly payments on the loan. With a HECM loan the lending institution doesn’t get paid back until the house is sold.

Main Changes

The amount of money that a borrower can access with a Reverse Mortgage depends on his age, how much equity he has in the house and the interest rate on the loan. With the new rules, seniors will be able to cash out about 10 percent to 15 percent less of their equity than HUD previously allowed. While this is disappointing to people who need money fast, HUD’s rationale involves protecting borrowers from getting into difficulties by withdrawing too much of their equity and, after going through that principle, being subsequently unable to maintain their obligatory loan payments and house upkeep.

Now, for instance, a 62-year-old who obtains a loan with a 5 percent interest will be able to borrow up to 52.6 percent of the home’s appraised value, including loan fees.  That’s lower than the previous 61.9 percent that the same homeowner would have been able to borrow under the previous terms. At the same time, a 90-year-old homeowner can get up to 66 percent of the home’s value with that same interest rate. Higher interest rates result in a lower cap.

Limits

Under the new rules a homeowner won’t be able to cash out all of his allowable equity as soon as he gets the mortgage. The FHA limits the disbursement payments during the first year to no more than 60 percent of whatever the homeowner is allowed to borrow. Exceptions can be made for certain homeowners, including those with delinquent federal debt or pressing health issues.

There are other changes that the FHA is expected to initiate in early 2014. Chief among these is the requirement that homeowners demonstrate that they have sufficient income to cover required loan expenses such as property taxes and homeowners insurance. Again, this requirement aims to protect the borrowers and ensure that they don’t take out a loan that may, in the end, lead to the foreclosure on their home.