Financial advisers have been reviewing the new regulation changes to federal reverse mortgages. The changes, the latest in an itinerary of revisions that have taken place over the past two years, are transforming Reverse Mortgages from a “loan of last resort” to a viable financial planning tool.
Advisers note that these key changes are paving the way for the expanded use of reverse mortgages. They believe that more people will have access to Reverse Mortgages and will have the knowledge and the tools to use the loan effectively for their personal financial needs.
One of the major changes affects non-borrowing spouse of reverse mortgage borrowers who pass away or move out of the mortgaged property into an assisted living situation. The change, which took effect in August 2014, allows the non-borrowing spouse to continue to live in the home, even if the borrowing spouse leaves or dies. In addition, the borrower can still obtain an HECM loan even if the non-borrowing spouse is younger than 62. In such cases though, the loan’s principal amount will be actuarially based on the age of the younger partner.
Another major change affects the HECM for Purchase Program. The HECM for Purchase enables qualified seniors to downsize or relocate by using a Reverse Mortgage for Purchase in order to buy a new home and place it under the Reverse Mortgage umbrella. In this way, they save on closing costs for the new purchase and only pay fees for the Reverse Mortgage.
Ramsey Alwin, vice president of economic security for the National Council on Aging, explained that “Given the use of actuarial tables in determining the loan amount, it’s going to be a smaller draw as a result. That may squeeze out some of the individuals who are in crisis mode. But generally speaking, the new policies strengthen the product, protect the consumer and make it well-poised to be an important long-term financial planning tool, most likely for the more moderate- to higher-income population.”
Alwin also expressed concerns about other types of mortgages that are aimed at seniors. “There may be more predatory products created that are then attractive to the cash-poor, house-rich individual” he said. “We need to be vigilant about our consumer protections and consumer awareness for those individuals.”
Overall, industry observers are expecting an upswing in reverse mortgage applications, particularly among finically savvy baby boomers.
Peter Bell, president of the National Reverse Mortgage Lenders Association, said “If instead you take a reverse mortgage as a standby line of credit — a standby cash reserve that enables your other assets to remain intact and continue to grow in value or generate income — you end up with a greater amount of wealth to fund longevity.”
There are additional factors that are creating confidence in the future of the HECM loan. Costs and fees for the Reverse Mortgage product are expected to remain unchanged in the coming years. In addition, a new policy, to be implemented starting in March 2015, is expected to strengthen the market by requiring that Reverse Mortgage borrowers undergo a financial assessment before they are allowed to acquire a Reverse Mortgage.
Since the Reverse Mortgage involves financial responsibilities such as paying the monthly interest payments on the loan, homeowner’s insurance, hazard insurance, taxes and home maintenance, HUD wants to make sure that the borrowers will be able to maintain the loan. Lenders agree that this kind of structure will strengthen the entire loan product and will allow borrowers and lenders to look forward to a stable future for the Reverse Mortgage.