What Every Retiree Should Know

Millions of retirees face financial challenges as they try to make ends meet when their income drops. For many seniors, the equity they have in their home is their largest untapped asset, yet they don’t want to make the dramatic decision to sell their family home in order to access the equity that they’ve built up over the years. Many seniors prefer to remain in their home as they consider alternative ways to gain access to much-needed income.

Reverse mortgages promise to give retirees an easy way to access their home equity, but there are technicalities that you should understand before you consider taking out a Reverse Mortgage for that purpose.

What is a Reverse Mortgage?

One of the most confusing aspects of reverse mortgages is the terminology involved. In its traditional form, a reverse mortgage involves making an arrangement with a lender in which the lender makes monthly payments to the borrower in return for full or partial ownership of the mortgaged house. Reverse Mortgages have different payment arrangements. One alternative allows you to take payments for as long as you’re alive and remain in the home. Others allow you take payments for a fixed number of years, in a lump sum, or at a time of your choosing via a line of credit. The option that you choose will affect how much you’re able to borrow — in general, the percentage of home equity that can be borrowered will be higher for older seniors and lower for those at or near the minimum required age of 62.

The Federal Housing Administration’s government-insured reverse mortgage program uses private lenders to extend reverse mortgage loans. The primary benefit of a FHA reverse mortgage is that as long as the borrower remains in the home as his principal residence, the loan doesn’t come due. Only after the borrower dies, sells the home, or moves elsewhere does the reverse mortgage become due. In addition, if the outstanding loan amount exceeds the value of the home, the government will cover the difference so that the lender is protected.

Reverse Mortgage Costs

If you take out a Reverse Mortgage you pay between 0.5% and 2.5% of your loan amount as a mortgage insurance premium. Every subsequent year you pay another 1.25% of the outstanding mortgage balance which covers insurance costs. Lenders may charge origination fees of as much as $6,000 including charges of up to $2,500 for the first $125,000 of value, 2% of the next $75,000 and 1% of any value above $200,000. There are also monthly servicing fees which can add $30 to $35 to the cost of a Reverse Mortgage.

You can incorporate these costs into the loan so you don’t have to pay them out of pocket. This, however, reduces the amount that’s available to you to borrow or receive in monthly payments.

Residency

Borrowers must continue to live in the home. When a married couple is listed as borrowers on a reverse mortgage, their joint life expectancies may result in reduced payments if one partner is significantly younger than the other partner. Some homeowners choose to list just one family member on the reverse mortgage but if the borrower dies or requires long-term care outside the home, the spouse is no longer eligible to receive the Reverse Mortgage payments (although the spouse can continue to live in the home).

Reverse mortgages can be complicated but they also offer a way for seniors to tap into their home’s equity in a way that’s consistent with the typical retiree’s lifestyle. Borrowers who are prepared for the potential issues generally find that a reverse mortgage can be a great solution day-to-day needs, while providing them with the opportunity to continue to live in their home.


The Department of Housing and Urban Development (HUD) announced that it is delaying implementation of the long-heralded Financial Assessment rule. This announcement comes just weeks before the new rule was scheduled to take place.

HUD cited a delay in the delivery of “certain system enhancements” that were required to support the policies which had been published in Mortgagee Letters 2014-21 and 2014-22. In an email notice, sent to lenders, HUD explained that the Federal Housing Administration (FHA) will publish a Mortgagee Letter in the coming weeks in which a new effective date for the policies detailed in those letters will be announced.

Lenders expect that the new effective date will be within 30 to 60 days of the original March 2, 2015 date which had been announced in previous Mortgagee Letters.

HUD also announced that is has revised Home Equity Conversion Mortgage (HECM) model loan documents in which requirements to specific clauses were detailed. These clauses pertain to:

*Life Expectancy Set-Aside

*Revised eligible and ineligible non-borrowing spouse certifications

*Reinstatement of the period of deferral of the due and payable status for eligible,

non-borrowing spouses.

For over a year, lenders have been preparing their staffs and trainees for the Financial Assessment. HUD issued the rule in November 2014 and lenders had expected it to be implemented quickly. Assessing borrowers’ financial capabilities and willingness to live up to their HECM loan obligations has been expected to create a major hurdle for lending institutions which, as soon as the rule is put into effect, will need to invest considerable time and effort into reviewing borrowers’ credit history and other financial considerations when determining applicants’ eligibility for the loan.

HUD has recognized this difficulty and has made every effort to soften the impact on lenders by giving them time to prepare for the change. In November 2013, then-FHA Assistant Secretary Carol Galante told National Reverse Mortgage Lender Association conference attendees “We have thrown a lot at you in a short period of time. We threw a lot at ourselves. But this was necessary to get a program that will be stable from a budgetary perspective. We had to make these changes before the start of the fiscal year.”

Since that time HUD has postponed the rule several times but lenders are aware that the rule will, in time, be instituted. Representatives of NRMLA, while aware of the burden that the new rule will put on their member institutions, have welcomed the change.

In signaling his approval of the new rule, NRMLA President Peter Bell explained the NRMLA position by saying “At NRMLA, we are always concerned about protecting those aging Americans who cannot afford to meet the responsibilities of reverse mortgage loans. Financial assessment will help determine if the product is right for the potential borrower. By implementing this process, HUD is responsibly making the HECM a safer product.”

The November 2014 Mortgagee Letter 2014-22 was designed to prepare lenders to implement financial assessments for HECMs assigned on or after March 2, 2015. Lenders began training programs for their staffs in preparation for the landmark change that would seemingly appear in a matter of three months.

The latest delay gives these lenders more time to train their personnel after what, hopefully, will be the final delay.

House Democrats are Calling for Expanded Reverse Mortgage Protections

A group of 17 Congressional Democrats sent a letter to Department of Housing and Urban Development Secretary Julian Castro, calling for more foreclosure protections for Home Equity Conversion Mortgage borrowers’ spouses.

Their letter was prompted by a group of surviving spouses, whose names were not on the titles when their partners acquired HECM loans under the government reverse mortgage program. These spouses sued HUD after they found themselves threatened with possible foreclosure upon the death of their spouses. The litigation led to an order by the United States Court of Appeals to HUD to change their policy regarding surviving spouses. The policy was changed and implemented on August 4th 2015. In addition, as a result of the litigation, HUD has been drawing up a new policy for the spouses of borrowers who took out loans previous to that date.

Led by Rep. John Lewis, D-Ga., the Congressional Democrats (John Lewis, Rep. Barbara Lee, Calif.; Rep. Bobby Rush, Ill.; Rep. Henry “Hank” Johnson, Ga.; Rep. Alcee Hastings, Fla.; Rep. Keith Ellison, Minn.; Rep. Suzanne Bonamici, Ore.; Stephen F. Lynch, Mass.; Rep. Alan Grayson, Fla.; Rep. Mark Takano, Calif.; Rep. William Keating, Mass and Sheila Jackson Lee, Texas) the group asked Castro to direct HUD and the Federal Housing Administration to extend protections to all HECM-borrowing spouses – to offer them the same protections which had been given to surviving spouses of HECM borrowers whose loans were originated after August 4th.

The letter reads, in part “HUD has not taken action to protect surviving spouses subject to existing reverse mortgage loans from losing their homes. The same protections must be offered to every surviving spouse regardless of when their reverse mortgage was created.”

While the loans originated after August 4th 2014 take the new policy into consideration, the policy doesn’t relate to loans that originated before that date. This discrepancy leaves the original litigants in limbo. “Many people in this situation, where one spouse is not listed on the reverse mortgage, are in jeopardy of losing their homes,” says AARP Foundation senior attorney Jean Constantine-Davis, who took the case to court and continues to represent the original litigants.

A spokesman for the HUD didn’t immediately respond to the letter and declined additional comment, noting that HUD typically declines comment on pending litigation. This letter, he pointed out, addresses issues that are related to the ongoing legal battles.

However, documents recently filed by HUD in court suggest that, in light of the fact that policy is still pending for “non-borrowing spouses” whose partners took out loans before August 4th, HUD is currently willing to consider postponing foreclosures for borrowers in this category and has done so in at least one case.

Reverse Mortgages as Income Supplements for Seniors

Homeowners over the age of 62 who have built up a equity in their home and wish to stay can tap into their home’s equity with a reverse mortgage.

This type of mortgage has become a popular way for seniors to fund their retirement. In 2013 Reverse Mortgage loans totaled $15.3 billion dollars, an increase of 20% over 2012, and when the total amount is announced for 2014, it’s expected to be even higher.

Reverse Mortgages, also known as HECM loans, may sound like a sweet deal for retirees, but a reverse mortgage comes with disadvantages so it should only be considered by individuals who are prepared to meet the loan’s obligations and who can benefit from the loan’s advantages.

A reverse mortgage allows older homeowners to borrow money against the equity in their home if they either own their home outright or have a small existing mortgage that can be paid off by the loan.

Instead of paying back the HECM loan each month like a typical home loan, the bank pays the borrower. The loan doesn’t need to be repaid until the borrower sells the home, moves out or dies.

Borrowers can receive the money as monthly payments or as a line of credit, with the amount that can be borrowed dependent on the borrower’s total equity, his/her age, the length of the loan term and current interest rates.

Benefits of a reverse mortgage include the advantage of being able to convert equity into cash without selling the home. This means payouts that help to fund retirement. .

The borrower doesn’t need to have a job, steady income or even good credit for approval. Through most of the loan’s existence, the borrower didn’t need to prove financial solvency, but as of March 2015, the borrower will need to prove that s/he has the means and the willingness to maintain the loan by showing past financial responsible behavior and the ability to properly manage financial obligations.

Some of the drawbacks of a Reverse Mortgage include the fees which include origination fees, service fees, a mortgage insurance premium and closing costs. These fees can be rolled into the Reverse Mortgage’s proceeds so the borrower pays the fees from the proceeds of the loan. There is also a monthly interest payment which must be paid every month throughout the life of the loan.

Borrowers are also responsible for insurance payments property taxes and home maintenance throughout the course of the loan.

When the borrower dies or leaves the house, the house will be sold to repay the mortgage. This means that the house cannot be passed onto heirs unless they can help repay the balance owed.

Financial advisor and certified estate planner Craig Smalley explains that “Reverse mortgages have their place, but the problem is that they’re sold to people who shouldn’t have them because it doesn’t work for them. They are for those that have little or no retirement funds, and have no heirs really to speak of.”

For senior homeowners who need cash and have substantial equity in their home, a reverse mortgage may offer a sound solution. It’s important to consider all options before making a decision.

Standby Line of Credit - Hidden Value of a Reverse Mortgage

Over the past few months the Journal of Financial Planning has published several articles which take a look at how retirement income can be enhanced by opening a standby line of credit through a reverse mortgage and using this line strategically.

According to current HECM rules, homeowners can earn additional funds if the line of credit exceeds the home’s value. This potential income increases when you look at today’s low interest rates. Even if the value of the home declines, the line of credit will continue to grow, regardless of the home’s subsequent value.

When you combine this with the fact that a HECM is a non-recourse loan, it’s clear that a HECM line of credit can provide a valuable hedging for home prices.

Reverse mortgages have been available through banks since the ’60s but in 1989 the federal government systematized these loans through the Home Equity Conversion Mortgage (HECM) Program. HECMs operate under the auspices of HUD. Over the years the HUD has updated the administration of the HECM program to ensure that reverse mortgages will be used responsibly. Recently, in September 2013, the government streamlined the program, combining the HECM Standard and HECM Saver into one Reverse Mortgage option.

To determine the amount of equity that a homeowner has in his property, the HECM includes the appraised home value and the age of the younger spouse (for joint owners and one spouse must be at least 62). If the home’s value exceeds $625,000, the amount that’s available to borrow is based on a $625,000 maximum. If the home is worth more than that amount, is easier for the home value to keep pace with a more limited line of credit.

When the borrower opens a line of credit, the fees will include a 0.5% upfront mortgage insurance premium payment (which ensures that the lender will be repaid in whole), an origination fee, and other third party and settlement costs. The borrower can pay these fees in cash or he can pay them via the line of credit. Using the loan the borrower can build an efficient retirement income strategy while hedging the home’s value and potentially receiving a larger payoff later in life.

The initial line of credit grows automatically at a 1.25% mortgage insurance premium (MIP). If someone is looking for a way to maximize the gains from using the line of credit as a hedge for the home’s value, he’d probably pay a higher lender margin which then helps the line of credit to grow more rapidly and surpass the value of the home.

A key feature of the HECM is that it is a non-recourse loan so no matter how much the borrower takes as part of the line of credit, the amount due cannot exceed the home’s value at the time of repayment.

Avoid Reverse Mortgage Surprises

Reverse Mortgage offer benefits to seniors who can access the equity that they have in their home for extra income. What happens if the borrower dies, leaving a non-borrowing spouse? Lending institutions often have to help the surviving spouse navigate the bureaucratic fallout that occurs when the borrowing spouse dies. If the surviving partner is not prepared for the situation, the resulting lack of communication can cause significant loss of money and even property.

Reverse-mortgage borrowers must be 62 or older and have paid off most or all of their mortgage. Under a HECM loan borrowers don’t need to pay back principal or interest until the home is sold or the homeowner dies.

Up until last year, if the sole signee on a Reverse Mortgage died, the non-signatory partner would have to leave the home. As of August 2014 new non-borrowing spouse rules allow those spouses to remain in the home even after the borrower has passed away.

Today, the vast majority of reverse mortgages are federally-insured home-equity conversion mortgages. Borrowers are allowed to tap into 60% of their home equity up to a maximum loan amount of $625,500. However, the FHA has instituted stringent repayment rules that must be followed to allow a non-borrowing spouse to continue to live in the home.

When the last remaining borrower living in the property dies, the Federal Housing Administration requires that their loan servicer send a letter which states that the balance of the loan is due. The estate administrator or heir is given 30 days to state whether the loan will be repaid or the house sold. A response must come within that time or foreclosure proceedings may be initiated.

If a non-borrowing spouse is living in the house, s/he must send the lending institution a clear statement of intent, within 30 days, stating his/her position in the home and his/her intention to continue to live in the house

Prior to August 2014, non-borrowing spouses were required to evacuate the house after the borrowing spouse died or move out. However, after a class action suit on behalf of non-borrowing spouses, HUD changed the rule.

Today, a non-borrowing spouse, even if under age 62, can remain in the home as long as he or she wants. The spouse won’t receive monthly payments of home equity and interest will continue to accrue. But there is no lender deadline or foreclosure.

If no spouse is living in the home when the borrower dies or leaves the property, the heirs must write a letter to the lending institution within 30 days to inform them of their intentions – whether they plan to buy the house, take out a traditional mortgage on the house or allow the house to be sold to repay the Reverse Mortgage. Failure to write this letter within 30 days – even if the heirs need a time extension to organize the procedure – can result in foreclosure.

More tips to avoid reverse-mortgage surprises:

  • Borrowers should talk to their heirs in advance to review repayment rules and ensure that everyone knows what to do in all cases.
  • Keep current with home values. Home sale prices generally exceed the loan amount, meaning that if the house sells for less, the heir will never be responsible for the difference.
  • Prepare to see interest rates accrue. Interest will continue to accrue on a loan until the house is sold or the mortgage is paid off. The estate will receive a mortgage-interest deduction on its tax return.

Considering a Reverse Mortgage – Pros and Cons

Over the past decade, you might have seen reverse mortgages marketed as an easy way for seniors to cash in their home equity to pay for day-to-day living expenses. However, you should be aware that many borrowers have learned that obtaining a Reverse Mortgage without the proper consideration has led to significant financial problems down the road.

In actuality, in some cases, reverse mortgages can be quite helpful to borrowers. However, it is imperative to do research on the product before you sign.

Reverse mortgages are home loans for seniors in which borrowers convert some of their home equity into cash. There are 3 different types of Reverse Mortgages — Single-purpose reverse mortgages, Home Equity Conversion Mortgages and proprietary reverse mortgages.

Single purpose reverse mortgages and proprietary reverse mortgages are operated privately but the Home Equity Conversion Mortgage is a government-insured program which is regulated by HUD.

In a Home Equity Conversion Mortgage a homeowner can apply to borrow through the Reverse Mortgage if he is at least 62 years old and owns his home outright or has a low mortgage balance that can be paid off with the proceeds of the reverse loan. To qualify, the homeowner must not have any delinquent federal debt, must demonstrate that he has the financial resources to pay for the loan and must continue to live in the home.

Before applying for a HECM you should consider the pros and cons of this loan choice.

Pros of HECM Reverse Mortgages:

  • The HECM is a source of cash. You can access your equity as a line or credits or through regular monthly payments.
  • Proceeds are tax-free. The funds that you receive through a HECM loan are not considered taxable income by the IRS. If you have income through a HECM loan it will not affect your Social Security or Medicare. It may, however, affect your Supplemental Social Security or your Medicaid payments.
  • You will never owe more than the home is worth. When you die or leave the house, the loan becomes due, but regardless of fluctuating housing prices, your heirs will not owe anything to cover the loan.
  • HECM Reverse Mortgages offer a borrowing option for seniors who want to downsize. The HECM for Purchase provides you with the opportunity to use your HECM to purchase a new home and acquire a HECM loan, all in one procedure.

Cons of HECM Reverse Mortgages:

  • You could outlive your equity. Reverse Mortgages should be seen as a supplemental source of income, but not as a source to rely on for daily expenses.
  • Your heirs won’t acquire your home unless the loan is repaid. If your heirs hope to inherit the home, it’s best to find some other funding solution such as a family loan or another conventional loan product.
  • HECM fees are generally more than the fees for conventional loans. There are origination fees, third party fees and interest payments. Also, you’ll need to maintain the loan by covering the costs for your homeowner’s insurance, hazard insurance, property maintenance and property taxes.
  • HECMs are adjustable rate products which rates affect the cost of the loan over time.
  • If you have to move out of your home and don’t live in the home for more than 12 months, the loan becomes due.

In general, reverse mortgages are a popular loan alternative for senior homeowners. For some people the loan they might be a good fit, but the loan isn’t for everyone. Applicants should obtain qualified financial advice before they apply.

Reverse Mortgage Lenders Encounter Good News Along with New Challenges

Home Equity Conversion Mortgages increased 12 percent during December 2014 over the previous month. This put HECM endorsements at the highest level during any single month since February 2014.

This is good news for Reverse Mortgage lenders who have been waiting to see how the HUD’s recent changes to the Reverse mortgage product will impact on the market.

Since autumn of 2012, HUD has been under pressure, both from Congress and from the courts, to make changes to the Reverse Mortgage. A shortfall in the Federal Housing Administration’s loan fund, caused by a high number of foreclosures, prompted Congress to give HUD the authority that it needed to make changes in the Reverse Mortgage so that they could close the gaps that had contributed to the high rate of foreclosures. In addition, in 2013, the United States Court of Appeals upheld a class action suit in which spouses of deceased borrowers appealed against being forced out of their homes after the primary HECM borrower had died.

Since early 2013 HUD has been instituting changes in the Reverse Mortgage loan structure to meet the demands of Congress and the courts. Some of these changes include

*Spouses of borrowers will be allowed to stay in a home which has been mortgaged under the Reverse Mortgage program. In addition, the size of a married couple’s payout will be based on the younger spouse’s age, even if that person isn’t listed on the mortgage’s title.

*The HECM Saver has been eliminated. The Saver offered a Reverse Mortgage whose costs and payout were lower than that of the HECM Standard. Now, borrowers can choose between conventional HECM loan and a HECM for Purchase, in which the borrower can combine the Reverse Mortgage and the purchase of a new home in one package.

* Borrowers can draw their payouts as a line of credit or in monthly payments. There is no longer any option to draw the funds from a Reverse Mortgage as a one-time draw (unless the borrower has extenuating circumstances, such as health care costs or debt – in such cases, there is a larger interest fee on the loan).

*Beginning in 2015, potential borrowers must submit to a credit check in order to show that they are able and willing to maintain the loan.

The National Reverse Mortgage Lenders Association met online with officials of the FHA after the release of HUD Mortgagee Letter 2014-22. Both government officials and NRMLA representatives noted that the new guidelines have created a stronger loan product and are responsible for the senior public’s increasing interest in the loan.

Reverse mortgage professionals are working with the HUD regarding another new requirement — seasoning requirements for existing non-HECM liens. The seasoning requirement came as something of a surprise to the lenders. Seasoning Requirements permit the payoff of existing non-HECM liens using HECM proceeds if the liens have been in place longer than twelve months or if they have resulted in less than $500 cash to the mortgagor. Seasoning requirements are effective for all loans assigned on or after December 15, 2014.

In general however, lenders, potential borrowers and government officials are optimistic about the future of the HECM loan. “The changes are not expected to impact more than a small percentage of potential borrowers” said Patrick Murphy, Vice-President of Briggs Financial Services. “Interest in the loan is growing, particularly among the baby boomer retiree population. Most seniors recognize that the benefits of the Reverse Mortgage outweigh the disadvantages. We expect to see a continued rise in Reverse Mortgage starts in the coming months.”

Preparing for Retirement with a Reverse Mortgage

In the past, most senior citizens had finished paying for their mortgage by the time that they reached retirement age. In today’s mobile society, where individuals and couples relocate frequently throughout their lifetimes, it’s not uncommon for retirees to have mortgages when they reach their 60s. For many seniors, this puts a strain on their retirement income as it reduces their disposable income at a time in their lives in which they don’t have a big financial cushion.

Today however, senior citizens have an alternative that their pre-1989 predecessors didn’t have – if they have enough equity in their property they can pay off the balance of their mortgage with the proceeds of a Reverse Mortgage.

Is it a smart move to convert a standard mortgage into a reverse mortgage?

Financial advisors who specialize in advising senior citizens are often asked this question. In formulating their answer, they must consider exactly what the senior citizen is looking for. Does he want to maximize his wealth in order to sell the home to make a profit, or leave as large an estate as possible to his heirs? Or, is he interested in simply using the equity that he holds in his home to boost his income for his expenses?

Financial advisors are generally agreed in their assertion that Reverse Mortgages shouldn’t be used to maximize wealth. The costs of the Reverse Mortgage make it an expensive loan which should be used with care.

Yet, for individuals who wish to increase their monthly income, a Reverse Mortgage is a useful tool. With a Reverse Mortgage, in effect, the homeowner mortgages his property to the lending institution and receives a portion of his home’s equity as a line of credit or as monthly payments.

Throughout the life of the loan, the homeowner must continue to live in the house. If the borrower dies or leaves the house, ownership of the home reverts to the lender who can then sell it in order to recoup the investment.

The homeowner continues to bear responsibility for maintaining the loan throughout the life of the loan. This includes paying the monthly interest payments, homeowner’s insurance, property taxes and home maintenance. Failure to fulfill any of these obligations may lead to foreclosure on the loan.

The majority of homeowners who apply for a Reverse Mortgage are in their mid- to late-60s. They are generally at the beginning of their retirement years and still healthy enough to look forward to living an active life but aware of the aging process and the difficulties and health issues that may be awaiting them.

By taking out the Reverse Mortgage these borrowers ensure that they’ll have more of a cushion to allow them to do more while their health is still good and they’re still active.

Reverse Mortgage income isn’t taxable and doesn’t affect the borrower’s Medicare but it can affect Medicaid eligibility.

To apply for a federally-insured Reverse Mortgage (also known as a Home Equity Conversion Mortgage – HECM) the potential borrower needs to sit with a HUD-approved counselor who will help him calculate his expected income from the loan as well as the loan costs and expected expenses. The counselor will also review with the borrower the terms of the loan to ensure that he’s prepared for the loan obligations.

Downsizing Your Home Without Downsizing your Pocketbook

When Gayle and Arthur Zamchuck started thinking about refinancing the mortgage on their home in Evanston IL, they assumed that they’d need to refinance in order to finance a move to a smaller home. But after speaking with a reverse-mortgage adviser the couple discovered that if they took a home-equity conversion mortgage (HECM For Purchase), a type of reverse mortgage, they would be able to downsize from their 2,600-square-foot house and buy a new home closer to their children without worrying about future mortgage payments.

There are several different kinds of Reverse Mortgages. Traditional reverse mortgages enable anyone 62 or older to tap their home equity for income. An HECM for Purchase is another type of reverse mortgage. HECM for Purchase works for seniors, facilitating the purchase of a new home in conjunction with the acquisition of a Reverse Mortgage. This cuts down on the paperwork, the bank costs and time.

You can use the proceeds from the reverse mortgage to finance the new home. If the new home costs less than the money that you received from your Reverse Mortgage, you’ll be able to draw on the remainder in monthly payments or as a line of credit. And both parts of the transaction are taken care via the HECM loan.

The basic rules of a HECM Reverse Mortgagealso apply to HECM for Purchase transactions. The new home must be your primary residence. You must commit to maintaining the home, paying the new home’s taxes, keeping up homeowners and hazard insurance payments and paying the loan’s interest. In addition, you must pay the third-party costs of the loan which include the lender’s origination fee and closing costs. There’s also an upfront mortgage insurance premium equal to 2.5% of the home’s purchase price. These costs can all be rolled into the loan. Many critics of the HECM feel that these costs make the loan expensive, but borrowers who are interested in the opportunity to use the equity that they have in their home for their needs find that the HECM loan is worthwhile.

Lenders will determine the percentage of the equity that you have in your home for which you qualify. This principal limit, is based on the ages of you and your spouse, the price of your new home (the lesser of the purchase price or appraised value, up to $625,500), and the current interest rate for the loan. Reverse Mortgage calculators can help you figure out how much money you’ll be able to access for your new purchase.

With current interest rates, the HECM for purchase may pay for all, or most of the cost of a new downsized home. The older the borrower and the lower the interest rate, the more you can access. If there’s a difference between your Reverse Mortgage funds and the cost of the new home, you must cover the remainder from your own funds.

You also have the option of reserving part of your payout as a line of credit. The loan comes due when the borrower dies or leaves the home. When this happens, the borrower’s family can repay the mortgage balance (plus accrued charges) or 95% of the current appraised value of the property, whichever is less. Otherwise, the property reverts to the lender who can sell the house to recoup the investment.

New Rules for a more Viable Reverse Mortgage Product

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.

Using your Resource to Increase Home as a your Retirement Income

If you speak to a financial adviser about ways to increase your retirement income, s/he’ll probably tell you to start by reviewing your available resources and thinking of creative ways that you can maximize those resources.

For most retirees, their most valuable resource is their home. By retirement age, a person’s home is generally completely or almost completely paid for, so optimizing its use won’t involve too many expenses. This will leave the proceeds for you to use at your leisure.

Many seniors jump into the trap of selling their home to downsize or refinance when they get into financial difficulties. But before you make such a move, check out the ways that you can put your home to work for you as an asset. It’s more preferable to have your home producing income for you than for you to sell the home, realize a one-time payout and then see your nest egg dwindle away.

  • Consider a long-term rental. It probably won’t involve a large expense for you to build a separate entrance, kitchenette and bathroom in order to rent out a section of your home. You can recoup your loss within a short period of time in rental income and then continue to rent out your property, with the resulting income going directly into your pocket.

According to recent trends, rents are rising and vacancy rates are dropping, so more people are prepared to pay more money for available rental properties.

You can contract with a property management company to handle all of the interaction with the tenants, including negotiations, rent collection, repairs and maintenance. Some internet companies can help you market your property.

  • Short term rentals are a good money-earner for vacation regions. It’s easier than you think. There are a number of online vacation rental sites that will promote your property for a small percentage of the rental income. While you wouldn’t have the full-time income that a long-term rental would give you, vacation rentals give you a high per-day premium to make up for the difference. You must be prepared, either yourself or using employees, to keep your place clean and well-maintained.
  • Reverse mortgages let you age in your own home. Reverse Mortgages are for retirees who seek a little more income so that they can enjoy a better quality of life.

A HECM, or a Home Equity Conversion Mortgage, is a federally insured loan product that allows you to draw your equity via a line of credit or through monthly fixed payments. Repayment on the loan doesn’t occur until you leave the house or die. You are obligated to maintain the home by staying up-to-date on home maintenance, household insurance, hazard insurance, property taxes and loan interest payments. If you don’t make these payments in a timely manner, the lending institution can foreclose on the house. But if you’re careful to fulfill all of your loan obligations, you can access the equity that you have in your home for your own benefit.

It’s important to remember that, as a loan product, the closing costs and fees reduce your available equity. Also, by taking out a Reverse Mortgage, your heirs may not be able to retain the property if they aren’t able to satisfy the terms of the loan after you die. So consider your estate plans if you choose this route.

Reverse Mortgages are available to individuals who

  • Are 62 years of age or older
  • Own their home or have paid off enough on their mortgage to ensure that a HECM loan will cover the remainder

FAQs from the Consumer Finance Protection Bureau

To meet the upsurge in interest in Reverse Mortgages, the Consumer Finance Protection Bureau has put together a new online resource to answer some of the most frequently asked questions about the Home Equity Conversion Mortgage product.

There are numerous topics, but some of the highlights of the booklet include questions about the suitability of a Reverse Mortgage under varying circumstances, information about loan costs and expenses and an overview of the recent changes that have, essentially, created a revised product under the name of the old Reverse Mortgage.

Some of the main points of the CFPB booklet:

How does a Reverse Mortgage work?

A reverse mortgage is a type of loan which enables older homeowners to borrow against the equity that they have in their home. It is called a “reverse” mortgage because, instead of making payments to the lender, the borrower receives payments from the lender. The money that the borrower receives, along with the interest charged on the loan, increase the balance of the loan each month. Over time, the loan amount will continue to grow and the borrower will have less and less equity in his home as his loan balance increases.

Qualifications for accessing a FHA Reverse Mortgage include

*Borrower must be at least 62 years old.

*Borrower must reside in the home as primary residence.

*Borrower must have paid off all, or the majority of, traditional mortgage.

When an individual takes out a Reverse Mortgage, neither his income tax obligations, Medicare nor social security pension benefits will be affected. A reverse mortgage might, however, affect any Supplemental Social Security payments that he might be collecting and may also affect Medicaid benefits.

What costs are associated with a Reverse Mortgage?

Reverse mortgages can involve more costs than other home loans. Borrowers must pay third party costs and the expenses associated with the loan such as title search, servicing charges and, as of this coming March, the costs of a credit check. In addition, borrowers are responsible for maintaining the property, paying property taxes, flood insurance and homeowner’s insurance and making monthly payments on the loan’s insurance. Failure to stay current with these payments will result in a default on the loan and foreclosure.

These payments are divided up into upfront costs (lender fees, upfront mortgage insurance, and real estate closing costs, upfront mortgage insurance) and long term costs (maintaining the loan). Some borrowers pay for the upfront costs with the proceeds from the loan but its important to remember that paying for upfront costs with loan funds is more expensive than paying out of pocket.

It’s also important to shop around for the best interest rate. The rates vary, according to the lender, and spending the time to find a lower rate can make a huge different in the long run, especially as the lender must continue to pay the interest every month throughout the course of the loan. When the borrower signs for the loan, he selects a fixed or an adjustable rate. There are also mortgage insurance payments which add an additional 1.25%, in addition to the interest rate.

Each month, interest and mortgage insurance charges are recalculated, based on the current balance of the loan. These charges are then added to the loan balance. The amount that the borrower pays in interest and mortgage insurance is compounded, similarly to the way that the balance on a credit card compounds. Loan balance is used to calculate interest and mortgage insurance charges each month – these charges include prior months’ interest and mortgage insurance charges. As the loan balance grows, the amount of the interest and mortgage insurance also grows.

Financial advisers suggest that, in order to minimize the interest and mortgage insurance costs, the borrower should draw out his loan money only when needed.

Where are Reverse Mortgages Heading?

Based on projections for the coming year, financial planners see Reverse Mortgages heading upwards. Over the past few years numerous changes have been made in the Home Equity Conversion Mortgage structure to strengthen the product and make it a safer loan for borrowers, lenders and the Federal government. Standards have been toughened and are continuing to change. In creating a new loan structure, the Federal Housing Administration aims to ensure that borrowers are better protected and lenders will continue to be interested in working with the loan product. These changes are showing results, observable in the slow climb of in Home Equity Conversion Mortgage starts.

Lenders are more confident in the HECM product than ever. Up until now, qualification standards for the loan were scant, but as of 2015, more qualification standards will be instituted. These include obligations for borrowers to submit evidence of their credit, income and cash flow. Lenders will be obligated to take steps to ensure that the potential borrower is able and willing to maintain the loan. This, HUD believes, will prevent the type of foreclosures which plagued the industry, particularly over the past few years.

In November 2014 the FHA adopted new guidelines which will tighten eligibility standards. This change is scheduled to take effect in March 2015. It is part of an effort to avoid the kind of losses to government insurance funds which were responsible for the 1.7 billion dollar shortfall in the FHA’s insurance loan fund, identified in a 2012 audit. At that time Congress demanded action and HUD moved, reducing maximum financing amounts and establishing new regulations to ensure that borrowers will have the means to maintain their loans.

Reverse mortgages are offered to seniors 62 or older. They allow borrowers to tap into the equity that they hold in their homes to obtain cash. Unlike standard mortgages, these Reverse Mortgages require no monthly payments. The amounts borrowed do not need to be repaid until the senior dies, moves out or sells the house.

The Home Equity Insurance Mortgage (HECM) program was originally intended to function, primarily, as an income supplement tool for retirees. Since it was introduced the program has grown, seeing its most rapid period of expansion over the last decade. But the housing crisis of 2008 hit the Reverse Mortgage hard. Many borrowers found themselves without sufficient income to pay their loan obligations and defaulted when they found themselves unable to maintain the loan, including paying local property taxes and insurance premiums. In addition, the values of many of the homes which secured the mortgages sunk in the wake of the recession. Studies published in 2012 showed that one out of 10 Reverse Mortgage borrowers was in default. Ultimately the Treasury was forced to step in and bail out the FHA insurance fund with a $1 billion-plus cash infusion, prompting Congress to call for action.

Under the original rules, applicants were not required to pass the type of underwriting tests which are typically associated with home mortgages — nobody checked applicants’ credit reports or past financial behavior. All that a potential borrower needed was to demonstrate that he had sufficient equity in his house was prepared to sit through a brief financial counseling session.

Starting in March, however, that’s going to change. FHA will begin requiring all reverse mortgage applicants to undergo a “financial assessment,” similar to the underwriting process that’s used for standard mortgages. Lenders will vet applicants for:

  • Credit reports, using merged data from all 3 national credit bureaus.
  • Payment histories on property taxes, hazard insurance premiums and homeowners association fees.
  • Income from regular and part-time employment, Social Security, regular draws on IRAs and 401(k) accounts, pension funds and investment earnings.
  • Recurring household debt obligations. Lenders will be obliged to ascertain what debts a potential borrower is already carrying, such as for medical bills or credit card debit, in order to come up with a cash flow and residual income analysis.

If an applicant looks weak or marginal on these tests, the lender can take into account any “extenuating circumstances,” such as an illness that temporarily cut off income or an unexpected hospitalization that led to late payments. But if applicants appear unlikely to make regular on-time payments for property taxes or hazard insurance premiums, they can be rejected for the loan or obligated to “set aside” potentially large portions of their loan amount for later payments by the servicing company handling the loan. These impounded funds, in turn, will reduce the effective cash that these borrowers will be able to obtain from their reverse mortgage.

What are the projections for the new loan product? Some veteran loan originators are concerned. Maggie O’Connell, a Danville, California loan originator for the Federal Savings Bank, says the new rules will hurt applicants whose credit and limited post-retirement incomes are lacking. Up until now, she notes, these types of clients have been the traditional core Reverse Mortgage borrowers. They acquired Reverse Mortgages in order to access extra money from their home equity so that they could live on the proceeds. Some lenders worry that the FHA is turning reverse mortgages “into a middle-class or upper-class program.”

Senior rights advocates, however, tend to support the concept of financial assessments. Lori Trawinski, a senior policy adviser at the AARP seniors lobby, reminds critics that “there’s always a balance between access to credit and responsible credit.”

Home-Equity Loan or Reverse Mortgage?

If you are a homeowner you may be considering ways in which you can convert your home equity into cash. You may need the funds to pay for living expenses, healthcare costs, a home remodeling job or other necessities or you may just want to use some of the equity that you’ve built up over the years for a vacation or other project.

If you’re looking into these options and you are aged 62 or older you have two choices. You can access a home equity loan or you can take out a federally-insured Reverse Mortgage, also known as a Home Equity Conversion Mortgage (HECM) loan. Both of these alternatives give you the chance to tap into the equity that you have in your property without the need to sell or leave your home. Each of these products has its pros and cons so you should be sure that you understand your options before you make your decision.

Reverse Mortgage

In general, buyers purchase their new home with a forward mortgage. The forward mortgage, also called a “regular mortgage,” involves borrowing money from a lending institution and then making monthly payments to pay down the principal and the interest. Over time, the debt decreases as the buyer’s equity increases so when the homeowner has paid off the mortgage in full, he’ll have full equity and own the property outright.

A reverse mortgage reverses the process: Instead of making payments to a lender, a lender makes payments to the homeowner, based on a percentage of the home’s value. Over time, the debt increases (as payments are made and interest accrues) so the homeowner’s equity decreases as the lender purchases more and more of the equity. The homeowner continues to hold title to the property. If the homeowner dies or moves away, becomes delinquent on property taxes and/or insurance or allows the home to fall into disrepair, the loan becomes due. At that point the lender sells the home to recover the fees and the money that was paid out. Any equity left in the home goes to the borrower’s heirs.

If both spouses have signed onto the reverse mortgage, the bank cannot sell the house until the surviving spouse dies.

Home-Equity Loans

A home equity loan works in the same way as a Reverse Mortgage in that it lets you convert your home equity into cash. It is similar to a forward mortgage – in fact, a home equity loan is also called a second mortgage. Borrowers receive the loan as a single lump-sum payment and can make regular payments to pay off the principal and interest, which usually involves a fixed-rate.

There’s another type of home-equity loan as well, called the home equity line of credit (HELOC). With this type of loan borrowers have the option of borrowing up to an approved credit limit. While borrowers pay interest on the entire loan amount with a standard home equity loan, they’ll pay interest only on the money they actually withdraw with a HELOC. HELOCs are adjustable loans with monthly payment changes that fluctuate as interest rates change.

Interest that borrowers pay on reverse mortgages is not tax-deductable but the interest that is paid on home-equity loans and HELOCs can be deducted from a borrower’s taxes for loan amounts up to $100,000.

Some additional points regarding each of these loan options are:

Reverse Mortgage:

  • The borrower retains title to his home
  • Borrowers can draw their payments as a line of credit or as monthly payments
  • Borrowers can access up to 60% of their equity during the first year of the loan
  • Medicare benefits are not affected by a Reverse Mortgage but Medicaid benefits may be affected
  • Social Security retirement benefits are not affected by a Reverse Mortgage but Supplemental Social Security payments may be affected
  • Taking out a Reverse Mortgage involves paying third party costs (loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees, and various other closing costs ) and interest on the loan
  • A reverse mortgage will almost always decrease the equity in the property so less money will be available to heirs

Equity Loan:

  • Home equity loans are secured and approval can be based on solely on the borrower’s credit score, giving the potential borrow a high chance for approval.
  • A line of credit from a Equity Loan can act as backup, at a lower rate than credit cards.
  • Equity loans are suggested for individuals who need to cover expenses for a short time – they are not a long-term solution.

HUD issues 2014 HECM Assessment Report

The Department of Housing and Urban Development (HUD) has issued a financial assessment for the Home Equity Conversion Mortgage (HECM) program. The November 2014 report has been anticipated for several months and ensures that the assessment criteria for Reverse Mortgage borrowers will be uniform for all HECM case numbers issued on or after March 2, 2015.

The Department set out its terms in Mortgagee Letter 2014-22. The letter will guide the lending institutions which are involved in granting HECM mortgages to ensure that all lenders will follow centralized criteria that evaluates a borrower’s willingness and capacity to maintain his/her loan obligations, including paying all property taxes, homeowner’s insurance policies, flood insurance and home maintenance costs which are associated with the property.

In its Mortgagee Letter about financial assessments, the HUD stated “The mortgagee must evaluate the mortgagor’s willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements. In conducting this financial assessment, mortgagees must take into consideration that some mortgagors seek a HECM due to financial difficulties, which may be reflected in the mortgagor’s credit report and/or property charge payment history. The mortgagee must also consider to what extent the proceeds of the HECM could provide a solution to any such financial difficulties.”

The need for a change in the existing structure of the HECM loan became obvious when a 2012 Federal Housing Administration audit uncovered a 16.5 billion dollar shortfall in the agency’s mortgage program. Auditors were able to ascertain that a large part of the program was caused by the Reverse Mortgage program, which allows senior homeowners to access the equity that they hold on their homes by mortgaging their homes to a lender – after the borrower dies the house reverts to the ownership of the lender which can then sell it and recoup its investment. Many seniors fell behind on their obligatory loan responsibilities, either because they were unaware of these obligations or because their Reverse Mortgage funds dried up, leaving them without adequate financial means to keep up the loan. When lending institutions foreclosed on the homes of these individuals, the FHA was obligated to pay the insurance on the foreclosures, creating the shortfall in their loan fund.

Congress mandated that HUD must rework the loan structure and, to meet this goal, HUD restructured the loan. Starting in March, lending institutions will be obligated to review potential borrowers’ financial history to ensure that the borrower will be ready and able to maintain the loan. If the borrower’s credit history indicates possible future problems, the lender can mandate a set-aside fund which will pay for the loan’s interest and other costs.

In the mortgage-e letter, the HUD describes which documents reverse mortgage borrowers must supply when making their loan application. Documentation includes credit history documentation, property charge verification, income verification, asset verification, documentation of extenuating circumstances or compensating factors, residual income analysis, and calculations for residual income shortfall set-asides and life expectancy set-asides.

National Reverse Mortgage Lenders Association president Peter Bell commented on the change, saying “It is good news; HUD has provided an answer for us.” The NRMLA will analyze the new assessment and guide its members in implementation.

Updated reverse mortgage guide: New Information

On September 24, the Consumer Financial Protection Bureau (CFPB) published an updated reverse mortgage guide on its blog which explains recent changes in the HUD Reverse Mortgage program. The post highlights the new limits on the first-year Reverse Mortgage payouts as well as HUD’s new protections for non-borrowing spouses.

In the Updated Reverse Mortgage Guide: Two Things that You Should Know, potential borrowers are given an overview of how the recent changes in the structure of the Reverse Mortgage can affect them. The Guide aims to help borrowers maximize their loan. The CFPB updated the guide because, over the course of the last two years, the loan has undergone significant changes. As increasing numbers of senior homeowners explore the HECM loan option, it’s more important than ever that potential borrowers be made aware of all of the implications that taking out a loan involves, including the pros and cons, of the loan.

As they approach retirement age, increasing numbers of senior homeowners are considering tapping their home’s equity to get a return on the investment in their property. They feel that it’s time for them to enjoy the fruits of their labors and, what better way to do that than to take out a mortgage on their home and use the proceeds at their leisure. A Reverse Mortgage allows them to do just that. The Reverse Mortgage loan reverses the mortgage, so that the lending institution actually pays the owner cash for his home but doesn’t take possession of the home until the owner dies or leaves the property for more than 12 months.

Reverse Mortgages are open to senior homeowners aged 62 or older. The premise of the loan is simple but the terms of the loan can be complicated. HECM loans work best for homeowners who are aware of the terms of the loan as well as their options.

Before signing for a HECM loan, the potential borrower should sit with his/her family and consider:

  • The cost of homeowners’ insurance, home maintenance and taxes which must be kept up under the terms of the loan
  • Plans for continuing to live in the home or bequeath it to family members
  • Plans for dependents or others who are living in the home
  • Alternatives to the reverse mortgage

The Reverse Mortgage was launched by the Department of Housing and Urban Development in 1989 as a strategy that allows senior homeowners access to the equity that they’ve built up in their home. The economic downturn of 2008 created more interest in Reverse Mortgages. Pensions plummeted and tens of thousands of retirees who, until then, had thought that they would have enough income for their retirement years, discovered that they wouldn’t be able to manage. Seniors who planned ahead and managed their funds conservatively did well with their HECM loan but others, who used up their loan proceeds quickly, were often left without enough income to cover the loan’s costs and terms. These cases frequently turned into foreclosures. By 2012 the Federal Housing Administration had built up a 16.5 billion dollar shortfall that resulted from paying the insurance on these foreclosed properties.

In 2013 the HUD changed the payout structure of the loan. Borrowers no longer have the lump-sum payment option – a borrower can now access his money as monthly payments or as a line of credit, and may not access more than 60% of the available funds during the first year of the loan. The limit, according to HUD, encourages borrowers to make their money last longer.

A second loan revision involves protections for non-borrowing spouses. Prior to August 2014, the surviving spouse of a couple who took out a reverse mortgage loan in the name of only one spouse would run into trouble when the borrowing spouse died. When the borrower died, the “non-borrowing spouse” was obligated to pay back the reverse mortgage or leave the property. Surviving spouses lost their homes and senior rights organizations challenged this policy in court. The Federal Appeals Court ruled that HUD was charged with the responsibility to institute changes that would protect the non-borrowing spouse Today, a non-borrowing spouse may be able continue to live in the home under certain conditions, even after the partner who signed the loan dies. The non-borrowing spouse, however will not receive any more payments from the reverse mortgage after his or her spouse dies.

Couples who are considering a reverse mortgage may find that borrowing together makes the most sense. If both spouses sign the loan, the surviving spouse will be able to continue to receive payments.

New Reverse Mortgage: What you Need to Know

As the effects of the 2008 recession continue to impact on retirees’ income, more and more senior homeowners are considering their options. Tapping into home equity is one such alternative and that option is an attractive one for people approaching or already at retirement age.

There are limited possibilities to enable an individual to access his or her home equity. The HECM Reverse Mortgage is one way in which older homeowners can use the their home ownership to access their equity as cash income. Reverse Mortgages are a special type of home equity loan which are available to homeowners aged 62 years and older. Individuals who take out a HECM loan mortgage their home to the lending institution but they can continue to live in the house for as long as they wish. When the borrower dies, or no longer lives in the home, the property reverts to the lender who then sells the home and recoups its investment. HECM loans are complicated loans which works best for senior homeowners who carefully review all of the pros and cons of the loan and consider all of their options.

What to Consider

Taking out a Reverse Mortgage is a big step, both for the potential borrower and his/her spouse and for the individual’s entire family, which will be impacted by the HECM loan. Before applying for a mortgage, seniors and their families should consider:

  • Plans for staying in the home or leaving it to family members
  • The loan’s costs, which include continued home maintenance, continued property tax and homeowner’s insurance payments as well as monthly interst payments on the loan
  • Plans for dependents or others who live in the home and who will be obliged, under the terms of the loan, to leave the house when the senior homeowner dies
  • Alternatives to reverse mortgages

There have been significant changes in the Reverse Mortgage structure over the last 2 years. Potential borrowers should be aware of these changes and prepare to meet the new requirements and structure of the loan.

First-year Limits on Payouts

For many borrowers, the most striking change in the HECM loan involves the amount of money that the borrower can draw from the loan during the first year. For individuals who have been planning to “take the money and run” – perhaps on a vacation or for a longed-for project – these limits have been frustrating. The change was made because, in the past, borrowers often got into trouble by taking a lump-sum payment early on. While it was nice to enjoy the chunk of money, many borrowers found that, without any additional income, once their lump sum was finished, they didn’t have enough money to keep up the loan and they were faced with foreclosure. Today, borrowers can draw their money as a line or credit or in monthly payments (or as a combination of the two) and may not draw more than 60% of their equity during the first year of the loan. This limit ensures that borrowers learn to make their money last longer.

Protections for Non-Borrowing Partners

A second important change to the HECM loan addresses couples who are considering a Reverse Mortgage. Previously, couples who took out a HECM loan in the name of only one spouse ran into trouble when the borrowing spouse died. When the borrower died the “non-borrowing spouse” was obligated to choose between paying back the reverse mortgage or moving out. Some surviving spouses didn’t understand this clause while others were unaware of the impact that it would have on their lives.

Recent changes, which require every individual who is signed onto the house deed will sign onto the Reverse Mortgage, ensures that a non-borrowing spouse will be able continue to live in the home, even after the borrower dies. By signing onto the loan the non-borrowing spouse protects his or her right to continue to live in the mortgaged home.

Upcoming Changes

One of the biggest changes to the HECM mortgage is scheduled to be instituted in November 2014. That change involves the requirement that, if the lending institution assesses that a borrower may be unable or unwilling to meet the terms of the loan the lender can mandate that part of the proceeds from the loan be deposited into set-aside fund.

Borrowers whose credit history shows that they may be unable to adequately manage their funds and, due to possible missed interest, tax or other payments, may put their home ownership in jeopardy, can be required to deposit some of their loan proceeds into a fund where the money will be used to satisfy the terms of the loan.

All of these changes have been lauded by the National Reverse Mortgage Lending Association (NRMLA) as long-overdue measures that will strengthen the loan and bring new lenders and borrowers into the program.

Reverse Mortgage Counseling Saves Senior Americans Significant Sums

Reverse Mortgage counseling agencies are expanding their activities as Reverse Mortgages become gain in strength in the mortgage industry. Following numerous changes which have been introduced over the past 2 years, counseling agencies are reporting seeing a rising number of counseling sessions this year.

According to a recent study for NeighborWorks America by the Urban Institute, the federally-mandated counseling sessions are working – it’s estimated that homeowners, including senior homeowners, have saved millions of dollars under the National Foreclosure Mitigation Counseling program which mandates that individuals who are considering applying for a federally-insured forward mortgage or a reverse mortgage attend a counseling session with a HUD-approved counselor before they submit their application for the loan.

According to the findings, the counseling sessions enable potential borrowers to better assess the financial impact that the mortgage will have on their income, creating a situation in which they are better prepared to assume the responsibilities that come with the Reverse Mortgage loan. The study also determined that the counseling sessions have resulted in a significant decrease in the number of borrowers who default or face foreclosure due to non-compliance with the terms of their loan.

The Urban Institute reported

  • The NFMC program somewhat reduced the likelihood that counseled homeowners would end up in foreclosure…the NFMC program helped approximately 880 clients avoid going into foreclosure …
  • The NFMC program was even more effective at helping homeowners cure an existing foreclosure. Many NFMC clients entered counseling already in foreclosure (22 percent), or entered foreclosure after starting counseling (11 percent).
  • Loan modifications received by NFMC clients resulted in significantly lower mortgage payments than would have been received without the help of the program.

NeighborWorks, the agency charged by the HUD with training counselors, feels that the benefits are realized by both homeowners as well as the mortgage servicers and the entire the real estate community NeighborWorks America acting CEO Chuck Wehrwein said “If there was any lingering doubt about the value of NFMC counseling for homeowners and the broader real estate industry, the research announced [this week] should put those doubts to rest. Whether measured by benefits to homeowners through more likely mortgage modifications, sustainability of those modification or mortgage cures, the research answers all housing counseling benefit questions with a resounding ‘yes.’”

NeighborWorks has been busier than ever over the past few months as they try to train enough counselors to meet the increasing demand for HUD’s HECM product. To ensure an adequate number of HECM counselors, the HUD is allowing HECM counselors from the numerous agencies to provide face-to-face and telephone counseling nationally. These agencies include the National Council on Aging, Clearpoint, Greenpath and the Neighborhood Reinvestment Corporation. There are other agencies and community organizations which also offer Reverse Mortgage counseling. The cost of a counseling session averages at approximately $125 – the agency must inform the individual about the fee before making the charge. Some counseling agencies and non-profits offer reduced prices. Counseling agencies are required to waive the counseling fee if the individual’s income is less than twice the poverty level.

According to HUD, the objective of reverse mortgage counseling is to educate clients on how reverse mortgages work, the implications of taking out a Reverse Mortgage, the appropriateness of a reverse mortgage for each individual’s personal and financial situation and possible financial alternatives to reverse mortgages. HUD expects that the Reverse Mortgage Counseling session will cover the following topics: client needs and circumstances, features of a reverse mortgage, costs of a reverse mortgage, client responsibilities under a reverse mortgage, financial/tax implications of a reverse mortgage, financial or social service alternatives to a reverse mortgage, and warnings about potential reverse mortgage/insurance fraud schemes.

HUD also cautions the public that, under the terms of the Home Equity Conversion Mortgage, lenders are forbidden from promoting any one counseling agency to potential borrowers – in fact, the lender must offer the borrower the contact information for at least three counseling agencies from which the individual may choose.

The Consumer Protection Agency offers a few tips for potential borrowers who are preparing to attend a counseling session.

· For individuals who are behind on property taxes or insurance payments and may be facing foreclosure, free reverse mortgage foreclosure prevention counseling is offered. National counseling agencies have counselors who specialize in HECM foreclosure prevention counseling.

· The reverse mortgage counselor must be approved by the U.S. Department of Urban Development (HUD). HUD-approved housing counselors can be identified at the HUD counselor search page or by calling HUD’s housing counselor referral line (1-800-569-4287).

The New Reverse Mortgage

New Reverse Mortgage applicants are encountering a new term when they go to speak to their loan representative – the “New Reverse Mortgage.” Consumers are tired about hearing products referred to as the “new this-or-that” every time a small change is made, but in the case of the Reverse Mortgage, the term is accurate – due to 2012/2013 Congressional intervention and a HUD redesign, today’s Home Equity Conversion Mortgage looks, indeed, very different than the federally-insured Reverse Mortgage looked 2 years ago.

The process began 2 years ago when, in a report to Congress, the Department of Housing and Urban Development acknowledged a 16.5 billion dollar shortfall in the Federal Housing Administration’s Mortgage Insurance Program. Auditors determined that the shortfall was a result of defaults that came about when senior borrowers exhausted their Reverse Mortgage funds early on which left them without the necessary financial resources to maintain the loan.

The first change was almost immediate. The HUD almost quickly eliminated the HECM Saver option – this was an option in which the interest on the loan was reduced but so was the amount of equity that a borrower could draw. In addition, the HUD ceased the one-time draw alternative that allowed borrowers to access their funds in one fell swoop. Studies indicated that this policy, more than any other, had been responsible for encouraging seniors to use up their Reverse Mortgage benefits by withdrawing all of their cash at once which left them without sufficient funds to pay for the required interest payments, home maintenance, property taxes and homeowners insurance payments which were mandated by the terms of the loan. Today, borrowers can access their Reverse Mortgage funds as either a line of credit or as monthly payments, and may not access more than 60% of the funds during the first year of the loan.

Lenders are now expected to assess the potential borrower’s willingness and ability to maintain the loan by reviewing the potential borrower’s credit history and financial situation. If the lender determines that the borrower is at risk of not putting aside a sufficient amount of money to maintain the loan throughout the life of the loan, the lender is empowered to require that a set-aside account be established where the funds will be held to cover loan expenses for the foreseeable future.

The Reverse Mortgage industry has been welcoming these changes. Lenders are almost unanimous in their approval, noting that the changes are strengthening the HECM loan product. Lenders feel that borrowers can now access a higher percentage of their home equity at today’s low interest rates in a safe atmosphere.

They do note that the counseling network will take time to adjust to the new changes and provide the proper support to potential borrowers as they enter the new world.

One new rule, which came into effect in August, was introduced due to an AARP class action lawsuit on behalf of non-borrowing spouses. Over the years, a significant number of these spouses have been evicted from their homes when the borrowing spouse died or left the home. The Federal Appeals Court of Washington DC ruled that the HUD non-borrowing spouse foreclosures ignored the rights of these spouses. The rule, the court said, was unclear and left the non-borrowing spouse homeless through no fault of his or her own. In August 2014 HUD implemented a revised rule which requires, whenever applicable, that both homeowners sign on a Reverse Mortgage.

A new hurdle is now shaping up in Texas, which has its own laws regarding Reverse Mortgages. The Texas Court of Appeals ruling has put state regulations in conflict with Federal HECM regulations which has led to a halt on non-borrowing spouse loans. Additional, in other states, the non-borrowing spouse changes have raised additional questions, most frequently in cases in which a borrower has been married multiple times or in cases in which a couple is going through a divorce. The lender is obligated to obtain the signatures of both spouses on a Reverse Mortgage, even if one of the spouses will not be living in the house after the divorce. Solutions are being researched but, as of now, no resolution has been finalized.

Despite the changes—changes affecting the borrower, the lender and the HECM counselors, —the ultimate impact on the Reverse Mortgage industry is forecasted as a net positive.Lenders are unanimous in declaring that the changes are leading to an increased HECM product stability. From a business standpoint, the new changes have opened the market to more borrowers and to a more targeted borrower. Refining the loan causes temporary glitches and questions but in the long run, it offers a more established and steady loan product.