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 diverse. 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.