New rules which have been and will be announced by the U.S. Department of Housing and Urban Development (HUD) will make reverse mortgages safer for senior citizens.
A HECM reverse mortgage allows homeowners aged 62 or older to borrow against the equity in their homes. These loans do not involve repayments, provided that the home remains the borrower’s primary residence. Once the homeowner moves or dies, the loan must be paid back or, more commonly, the house is turned over to the lender.
Reverse mortgages backed by the HUD must, as of August 4th 2014, include the names of both spouses on the mortgage. Previously, only one spouse’s name was required on a HECM Reverse Mortgage, which bases the amount of equity being cashed out on the age of the borrower. Previously, if the younger spouse was not yet 62, his/her name might be left off the mortgage so the couple could receive more money. But this sometimes resulted in the younger spouse having to pay off the mortgage or be evicted from the house when the older spouse died.
The AARP filed suit over the issue which forced HUD to make the change. In the lawsuit, two widowers faced foreclosure and eviction when their spouses died and they found that they could not pay off the reverse mortgage loan. The AARP won the suit for the widowers and then turned the issue into a class-action suit on behalf of all homeowners who had been harmed by HUD’s previous reverse mortgage policy.
Industry brokers are pleased with the change. The safety clauses built into the loan have created a more stable product which will, in turn, draw more potential borrowers to the market. Representatives of the Reverse Mortgage Brokers Association applaud HUD’s new “common sense rule” even though most lenders didn’t see evictions of younger spouses not listed on titles as widespread. Some lenders, however, did see the issue as cause for concern. “Whenever a couple, in which one spouse was younger than the other, took out the loan, and the younger spouse was taken off the title, you’d find yourself opening a can of worms” one lender noted. “It’s very dangerous and I warned the borrowers against the practice, but some people were more interested in the possibility of obtaining more cash immediately than in what might happen down the road.”
The new rule will not cover prior reverse mortgages that were done in one spouse’s name — borrowers who have already set up reverse mortgages with one name must refinance since it’s not possible to add anyone back onto the property’s title.
A second change in the Reverse Mortgage is set to take place this fall when HUD will start to implement new financial assessment rules on underwriting of the reverse mortgage borrower.
The new rules require a financial analysis of each reverse mortgage applicant to ensure the potential borrower has enough income to cover his/her personal expenses, along with property taxes, home insurance and home upkeep which are all required under the terms of a reverse mortgage.
In 2013 HUD began a two-pronged effort to restrict the loans in order to lower a high foreclosure rate which had created a $1.7 billion dollar shortfall in the Federal Housing Administration’s mortgage insurance program.
The FHA created new guidelines that reduced the amount of money that could be taken out of a home in a reverse mortgage by about fifteen percent. It also restricted the amount that could be drawn during the first year. The change, tighter financial underwriting, will tighten the eligibility requirements so that only those borrowers who are able and willing to live up their obligations under the terms of the loan will be able to obtain a HECM loan.
“If an individual doesn’t have the financial worthiness” one loan officer said “it’s better that they don’t take out the loan, rather than set themselves up for failure and, ultimately, foreclosure. People who obtain a reserve mortgage and spend all their money right away get into trouble when, a few years down the road, they aren’t able to pay for the required annual expenses needed to maintain the loan.”
Industry analysts believe that the new underwriting rules will go into effect in the next 60 days.