Reverse Mortgage Stabilization Act of 2013 – Customer Safeguards

If you’re exploring the Reverse Mortgage option, check out the new book by Shelley Giordano, What’s the Deal with Reverse Mortgages. Giordani is the principal of a Reverse Mortgage Consulting Firm, the  Longevity View Associates. She also acts as the chair of the nonprofit Funding Longevity Task Force. Giordani’s book can help you understand your Reverse Mortgage options which include using lines of credit verses monthly payments, fixed versus variable loans and all of the mortgage fees.

In her book Giordano discusses the merits of (HELOCs) – home equity lines of credit, as opposed to lines of credit offered by HECM loans. The HECMs are FHA-insured open-ended reverse mortgages. HELOCs, Giordano writes, have significant disadvantages to the borrower since borrowers are obligated to repay principal and interest with a HELOC whereas under a HECM loan there is no such obligation. Lending institutions can cancel a HELOC loan if there is reason to believe that a borrower has insufficient assets or income while borrowers with a HECM line of credit aren’t vulnerable in this way.

Many financial analysts believe that one of the significant disadvantages of a HECM involves the high closing costs. First of all, closing costs differ from lender to lender, so it’s important to shop around – even if you have a lender that you want to work with, find out what the closing costs are with different lenders and then use that information to negotiation the best deal for yourself. Some financial institutions are offering, at present, reverse mortgages with closing costs as low as $250. Don’t forget to check the interest rates though – there may be a tradeoff for lower closing costs.

If you intend to maintain a line of credit for a long period of time, most financial advisors believe that the HECM offers significant advantages over the HELOC – provided that  you can obtain a HECM with very low (or no) closing costs.

Reverse Mortgage Stabilization Act

The Reverse Mortgage Stabilization Act of 2013 was a game-changer in the Reverse Mortgage industry. The act was created to provide safeguards for consumers, lenders and the FHA which insures the loan. The act introduced financial assessments for borrowers. These financial assessments are intended to form  the basis for HECM loan approvals and ensure that borrowers would have the financial wherewithal to pay real estate taxes and homeowner insurance and maintain their homes, as stipulated by the loan contract. Prior to this reform, there was a high rate of foreclosures with the loan, causing foreclosures and evictions (and big insurance payouts from the FHA). Today, as long as a potential borrower can meet the financial assessment requirements and maintain his/her residence in the home, there is no danger of foreclosure.

Prior disadvantage was also addressed by the Act of 2013. Previously, if the borrower who signed on the loan died or left the house, the surviving spouse was obligated to repay the outstanding loan in order to remain in the home. Now, a non-borrowing status (NBS) has been created in which the widow(er) is able to defer due and payable status within 90 days after the death of the last surviving borrower, thereby establishing legal ownership to remain in the property.

Seniors who are looking for extra income should consider a Reverse Mortgage but only after other options, such as downsizing or selling and renting an apartment, have been examined. Also, if you feel that it is important to leave equity to your heirs, a reverse mortgage isn’t your best option since there is no guarantee that there will be equity left after your death.

Don’t forget – you must complete a counseling session with an approved FHA counselor before you apply for a reverse mortgage. In addition to the counselor’s advice, you should also consult your own financial adviser or attorney before you make your decision about which type of mortgage is best for you. And don’t forget to comparison shop in order to select a lender whose terms are the most cost-effective.

What Can You Expect From a Reverse Mortgage Counseling Session?

Reverse Mortgages are popular borrowing options for older Americans. But before you can start the process of applying for a Home Equity Conversion Mortgage (HECM) loan, the Department of Housing and Urban Development mandates that you attend a reverse mortgage counseling session. What does that mean?


To get approved for a HECM loan, you must attend a counseling session with a HUD-approved counselor. These counselors have received training in Reverse Mortgages and can provide you with a complete picture of the loan, its pros and cons, and your rights and responsibilities under the loan.

Your lender can suggest counselors or counseling agencies in your area, but counselors and lenders are forbidden from working in conjunction with each other, so the lender must present you with at least three counseling alternatives. Alternately, you can (and should) check out possible free counseling sessions which are often offered by local housing rights groups, senior citizens organizations seniors rights advocates.

Every session is individualized, and will take into account your specific circumstances (your income, your age, your marital status, your expectations for leaving property to heirs, etc). In Massachussets you can complete the session by phone, but in most states, you must complete the session in person. If you are married, you must bring your spouse to the counseling session, even if s/he is not going to be signing onto the loan.

So, what can you expect from your Reverse Mortgage counseling?

How a Reverse Mortgage Works

The counselor explains how a reverse mortgage works. You will learn more about the Federal Housing Administration, which is the administering agency that oversees the program. You’ll learn what the HECM limit is, about the Standard HECM versus the HECM for Purchase (where you can combine your purchase of a different property with your HECM loan) and what draw options you have.


Every case is individual and the counseling session will take that into account. You will present the counselor with individual information about your present and expected income, your present financial obligations, your home’s estimated worth and any other information that may be relevant to a Reverse Mortgage Loan. The counselor will help you do the math so you can see how much of your home equity you’ll be able to access and how that will translate into a line or credit or monthly payments.

The counselor will also help you compare your options with other financial tools or loan so you can get a better idea of the choices that are available to you.

Loan Obligations

It’s important for you to understand your obligations under the terms of the loan. What loan costs exist? (third party costs such as the fees that you’ll need to pay to the lender to initiate and administer the loan). How will the loan’s interest rate affect you? What monthly payments will you need to make to maintain the loan? What other payments (home insurance, tax payments, home maintenance) will you be obligated to maintain? And what will the consequences be if you don’t fulfill these responsibilities?


If you’re married or have some kind of relationship in which another individual expects to be able to live in the house after you die or otherwise must leave the house (partner, adult child, etc), how does a Reverse Mortgage impact on that individual? The counseling session will cover this information.

Loan Acceptance

Recent changes have made it mandatory for the lender to investigate your credit history to ensure that you are able and willing to maintain the loan. How might this affect your application? What can you do if your credit history shows that your past credit history or repayment history is unsatisfactory? The counseling session will discuss the set-aside fund which the lender may set up with some of your loan funds, which will cover these expenses and still allow you to take out a Reverse Mortgage.

The goal of the session is to educate you about the loan, not to convince you one way or another.  Weigh all aspects of the loan so that you’ll make the best decision for you and your family.

Reverse Mortgage Draw Options – Choose the Line of Credit

The Reverse Mortgage is promoted both as an option that allows seniors to add to their retirement income and as a “loan of last resort” for retirees who must access the equity that they hold in their home in order to meet regular expenses.

The HECM loan was initiated in 1989. Slight revisions have been made to the loan over the years. However, in 2012, Congress directed the Department of Housing and Urban Development to make significant changes to the loan structure. Congress wanted to more thoroughly protect borrowers AND the Federal Housing Administration which insures the loan, after it was revealed that the FHA had amassed a 1.6 billion dollar deficit due to payouts for defaulted loans.

There have been, and continue to be, many discussions over various aspects of the loan. However, most lenders and senior financial advisors agree that the line of credit feature offers borrowers the best option for using their HECM proceeds in their retirement planning.

Since 2012, some of the changes to the Home Equity Conversion Mortgage (HECM) program have made reverse mortgages a more sustainable product for the FHA as well as for borrowers and their non-borrowing spouses. Now, more than ever,  qualified borrowers who could benefit from a HECM are exploring the Reverse Mortgage option, since they see more clearly how a reverse mortgage can function as a viable supplement to a senior borrower’s retirement portfolio.

In particular, the line of credit feature is seen as the ticket to helping the HECM ditch that “loan of last resort” reputation and be viewed as an integral part of an individual’s retirement planning. Associate professor of finance in the John E. Simon School of Business at Maryville University in St. Louis, Dr. David Johnson, comments “If you are talking about planning, then yes, that has to be the focus”

A  line of credit for a Reverse Mortgage offers borrowers who are planning for the long-run and not seeking a last resort peace of mind. With the line of credit they know that they will have needed funds at their disposal. The interest on the funds allows the kitty to grow and the borrower(s) can use those funds at their discretion — to supplement monthly income, pay for unexpected health emergencies or delay drawing Social Security benefits.

Dr. Johnson says that “clearly, there are so many different ways you can use that line of credit. I’m confident that if you do a reverse mortgage and have a line of credit - whether you access it or not - it still changes people’s minds and gives them peace of mind knowing they have money that they can access in a short period of time if they need to.”

Johnson demonstrates the various ways that borrowers can use the line of credit. “It’s almost like a nest egg that’s going to grow even if you may not need the funds right now.

In his paper titled “Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market” Johnson discusses current and future challenges with which retirees must contend. He demonstrates ways in which a reverse mortgage can be used to provide supplemental retirement income.

The standby reverse mortgage line of credit, he points out, aids in retirement planning as it benefits borrowers who are thinking of ways to fund their senior years.

Johnson commented that “We need to start thinking about and planning what we’re going to do in the future, because most of us are going to outlive our assets and if we don’t have some alternative, it’s going to be much tougher when it occurs.”

He acknowledges, however, that, while reverse mortgages have the potential to help many retirees, lack of education is still the biggest impediment to greater utilization.

“You can’t force people to become educated… If someone out there has a strong opinion that there’s something wrong about reverse mortgages it’s difficult to change their opinion… People don’t realize how creative you can be; how many different ways you can use it; and how it makes sense to set it up now even though you may not need it now, because you can use it in the future.”

Changes in Reverse Mortgage Rules Saves Homes for the Surviving Spouses

HUD has again changed its policy regarding the rights of surviving spouses in regards to Reverse Mortgages. Now loan servicers can assign a reverse mortgage loan, in which there is a surviving spouse, back to HUD. The lender can then make a claim for money owed against the FHA insurance fund.

Nation’s Housing

Following the passing of Gerald Marciano in March of 2014, his widow, Alva, got bad news. Her mortgage company informed her that if she didn’t come up with $118,000 –— the amount of principal, loan fees and accrued interest that had built up by the reverse mortgage on the home that she and her husband had owed for the past 22 years — they would foreclose on the home.

Alva didn’t have the money and there were no family members from whom she could borrow the cash so she got ready for eviction.

What happened? Alva’s situation is similar to that of an estimated 12,000 widows and widowers around the country. As a “surviving spouse” whose name does not appear on the reverse-mortgage contract, she had no rights to stay in the house once her husband, the sole signer on the HECM loan, had passed away. Alva and Gerald had been assured, multiple times that, in the event of her husband’s passing she would be able to live in the home indefinitely. In reality however Alva had no protection once the sole signee on the contact was no longer living in the house. .

Alva remembers that the mortgage company was sympathetic but unwavering. “They expressed their sympathies and said that they were sorry about my husband’s passing but the letter that they sent gave me no leeway. They demanded that I pay up what’s owed or they will foreclose. They noted that this is what is required under federal reverse-mortgage rules.”

If this had happened two years ago, Alva would have been out of luck. However, her husband passed away at a time in which the courts have taken an interest in this aspect of the HECM loan and have ruled that the FHA must do more to prevent these types of foreclosures.

Reverse Mortgages were created as a way to allow seniors 62 and older to withdraw funds against the equity that they have in their home. They do not have to pay back the debt until they die, move or sell the property.

For many years HUD enforced the section of the loan agreement that stipulated that the loan would be closed when the borrower died or left the house. But there have been lawsuits over the controversial rules regarding partners whose names were not included on the reverse-mortgage documents but who live in the home.

Some loan brokers promised a higher payout if only the older spouse was listed on the note. In other cases one spouse had not yet reached the required borrower threshold age of 62. Many of these individuals believed that they could have their name added to the contract when they reached 62 but either didn’t follow through on it or didn’t want to pay the resulting fees which could reach thousands of dollars.

Now, non-borrowing surviving spouses are covered under the new HUD policy. The lender can assign the loan back to HUD and make a claim for money owed from the agency’s FHA insurance fund.

It looks like Alma will be able to stay in her house after all. 

Where does the HECM Non-Borrowing Spouse Rule Stand Today?

The Department of Housing and Urban Development (HUD) continues to look for ways to deal with Home Equity Conversion Mortgages (HECMs) mortgagees and servicers vis-à-vis non-borrowing spouses.

In an August 24, 2015, letter to the National Reverse Mortgage Lenders Association (NRMLA), HUD followed up on their January 9, 2015 letter by continuing to reject industry requests for a more precise definition of a Non-Borrowing Spouse vis a vis Reverse Mortgages. NRMLA had also asked for an explanation of the non-borrowing spouse’s “legal right” regarding his/her right to remain in the mortgaged property following the death of the spouse. Lenders have been asking HUD for more information for months as they try to determine if, when and how to grant Non-Borrowing Spouses a deadline extension that will allow them to stay in the home.

Since the early days of the HECM program, HUD has been interpreting the regulations strictly. Their interpretations indicated that, upon the death of the last surviving Reverse Mortgage borrower, the lender would be able to call the debt due. This would be indicated even when the borrower was survived by a Non-Borrowing Spouse. If necessary, foreclosure proceeding would be initiated.

However, the U.S. District Court for the District of Columbia determined that interpreting the rule in this was was inconsistent with the statute that authorized the HECM program. In 2013 and again in 2014 the court ordered HUD to develop a plan which would, allow Non-Borrowing Spouses to continue to live in the mortgaged property when their borrowing spouses died.

HUD’s first response was published in January 2015. It established the Mortgagee Optional Election Assignment (MOE Assignment). Under this clause, HECM servicers and mortgagees would be able to assign the loan to HUD. The conditions that the non-borrowing spouse was obligated to meet included lack of any other HECM default and the ability to obtain “good, marketable title to the property or a legal right. The non-borrowing spouse was expected to produce these within 90 days after the borrower’s death – a hardship for many grieving widows and widowers. In addition, in order to continue to live in the home, the non-borrowing spouse was obligated to make a  one-time “Principal Limit” payment,  calculated on the basis of the difference in age between the borrower and the Non-Borrowing Spouse. This could, in some cases, involve payments of  tens of thousands of dollars, and senior advocates objected that it was an effective barrier for many Non-Borrowing Spouses who didn’t have the cash to take advantage of the MOE Assignment and remain in the mortgaged property.

In the face of threatened court legislation, HUD rescinded the MOE Assignment option on April 30, 2015 and, on June 12, 2015, redesigned the rule so that Principal Limit payment was eliminated. As of today, non-borrowing spouses are required to show, within 90 days of the borrowing spouse’s death, documents that they have “good, marketable title to the property or a legal right to remain in the property for life.” These documents may include a court order or executed lease but other options exist as well, and, as of now, HUD has refused to detail alternate ways in which the non-borrowing spouse would be able to demonstrate — within 90 days after the borrower’s death – their legal right to continue to live in the house.

In addition, HUD has not been helping in providing information to lenders that would give them guidelines to grant Non-Borrowing Spouses an extension to this deadline (for example, in a case in which the borrower’s probate proceedings are contested or are taking longer than 90 days.)

At this point HECM lenders are making the judgment calls about whether a Non-Borrowing Spouse can remain in the mortgaged property. These calls are based on the nuances of each state’s real property law. Legal experts say that such individual calls will lead to inconsistent outcomes based on where the property is located and who is servicing the loan. Senior advocates are concerned that the HUD’s approach may prevent a Non-Borrowing Spouse from remaining in a mortgaged property for illogical reasons – due to court delays or incomplete paperwork.

If HUD is interested in following the court’s directive to create regulations that adhere to the spirit of the HECM loan, they must work with the lenders.

A New Approach to Protecting HECM Consumers

Consumer advocates worry that HECM borrowers don’t really know enough about the loan, or how the loan works, when they sign on the loan. Reverse mortgages work differently and are much more complicated than forward mortgages – the typical type of mortgages that the people use when they purchase a home. The discrepancy between naïve borrowers and knowledgeable lenders worries many consumer advocates. Some steps which have been taken, and are still being taken, include:

Mandatory Counseling and Mandatory Disclosures

The Federal Government has attempted to educate potential HECM borrowers through mandatory disclosures and mandatory counseling. While consumer activists applaud the effort, they point out that these rules are limited and don’t adequately address the need to educate consumers.

Under the HUD’s directive, lenders cannot accept applications for HECM reverse mortgages until the potential borrower delivers a certificates which attests to his/her having been successfully counseled by a HUD-approved counselor. This counselor must be independent of the lender. Most borrowers find their counseling experience useful. However, critics note that it does not protect seniors from taking a Reverse Mortgage when they would do better without one. Few seniors opt out of the process as a result of counseling, suggesting that the process doesn’t push them to think about whether or not they really need a Reverse Mortgage.

Consumer advocates and senior advocates would like to see a counseling service that helps the individual decide whether or not s/he REALLY needs a Reverse Mortgage.


At present, the counselor advises the individual on certain aspects of the HECM transaction:

* Options for drawing cash upfront

* Amounts that can be drawn monthly for as long as the borrower lives in the home.

* Amounts that can be drawn monthly as a line of credit.

* Any combination of these draw options.

* How the loan will affect the borrower’s heirs

* How the loan will affect the borrower’s taxes and social security

* How the loan will affect spouses – both borrowing and non-borrowing

*  The borrower’s future financial status in connection with their draw decision.

* Initial and future costs to the borrower, including loan costs and future monthly fees and expenses.

* The combination of interest rate and origination fee

Avoiding a Second Counseling Session

It is advised that seniors combine counseling with financial advisors – specifically, financial advisors who specialize in senior finances – and HUD counselors to get a full picture of the HECM loan.

Reverse Mortgage to Purchase a Home: HECM for Purchase

Many seniors who investigate the options available to them for downsizing find that they have some hard decisions to make. They may have a substantial amount of equity in their current home and must then decide whether they should take out a loan and prepare to pay mortgage payments on their reduced retirement income or whether they should pay cash and tie up their liquidity.

HECM for Purchase

The FHA offers a solution to this quandary which can work well in certain circumstances. The HECM for Purchase is a reverse mortgage that allows you to purchase a home with the proceeds of your home sale through a reverse mortgage. This process gives you liquid income, together with your new home purchase, all in one transaction. Reverse mortgages allow the borrower to remain in the current home while also offering a good financial tool for retirement planning.

When you take out a HECM for Purchase, you sell your existing home and buy another home, all through the Reverse Mortgage procedure. You won’t have any principal or interest payment obligations. You then mortgage your new home to the lending institution but you retain the right to continue to live in that new home until you die or leave the home. No down payment will be required on your new home and your obligatory payments are limited to the Reverse Mortgage’s third-party costs, closing costs, home maintenance, home insurance, property taxes and loan insurance costs.

If there is equity left after you purchase your new home the lending institution will facilitate a line or credit or monthly payments to you. After you close the HECM loan the interest on the outstanding balance will accrue monthly, meaning that the loan balance grows over the years.

Loan Repayment

When you die, sell or move to a new home, or if you can no longer live in the home for a 12-month period (if, for instance, you move in with a child or move to a long-term care facility) the loan becomes due. Then there are different options available for you or your heirs.

If you are still alive or your heirs don’t have any interest in keeping the home, the lender will sell it and the loan and accrued balance are paid off. You and your heirs will never owe any money on the loan — if the proceeds aren’t enough to cover the cost of the sale and the accrued interest, FHA will pay off the difference from its insurance fund. This is a no recourse loan so, in such a case, there are no penalties levied against the borrower or his estate. If one spouse dies and the second partner is still living in the house, that second partner may continue to live in the home, provided that they had been listed on the original loan. Current court cases have left open the question of what will happen to non-borrowing spouses in the event that they were not on the loan from the outset.

If both spouses are deceased, their heirs have first rights to purchase the new home at 95% of the appraised value.

Prepare for the New HEMC Rules

As with a Standard HECM loan, HECM for purchase borrowers must demonstrate the ability and resources to meet HECM obligations (property tax payments, MIP insurance payments, home maintenance payments, home insurance payments). A standard formula, used by the lender, assesses the potential borrower’s readiness and willingness to pay loan costs. The lender checks the borrower’s liquid assets, income and past credit history. Seniors with a higher income require fewer liquid assets to qualify for the loan, those with more liquid assets require less income, etc.

If a potential borrower shows a chronic history of late payments, at a time that he had the ability to pay, his request for a HECM loan would undergo more scrutiny. If, however, his credit rating was impacted by a medical emergency or some other such sudden occurrence, the assessors will take that into consideration when deciding on his loan request.

Considering a HECM loan? Prepare Yourself to Get the Most out of your Reverse Mortgage

Imagine that you’ve been blessed with a wonderful family, good friends and a supportive community. Your children are off on their own and they’re not interested in living in your house when you no longer need or want to live there. You might want to leave it to the kids so that they can sell it and divide the proceeds among themselves. However, if you feel that you could benefit from an infusion of some extra cash of your own you can mortgage your home to a lending institution under the HECM program and continue to live in the home while you draw on the equity that you have in the house.

Types of Reverse Mortgages

There are two main types of Reverse Mortgages so it’s important to know the differences. Being prepared allows you to choose the option which is right for you.

Reverse Annuity and Home Equity Conversion Mortgages

Both the proprietary reverse annuity mortgage and the Home Equity Conversion Mortgage involve an agreement between you and the lender in which you borrow against existing equity in your home.

The Home Equity Conversion Mortgages (HECM). which is insured by the FHA, is the most common of the two.

HECM loans allow you to access a percentage of your home’s worth and draw the money in monthly payments or as a line or credit. This type of loan gives you the flexibility to have an infusion of ready cash. Your payments are delivered in increments to make sure that you don’t run out of income as you age. One of the biggest benefits of the HECM loan is that it is backed by the FHA which protects your investment.

The HECM program offers two options – you can access your home equity as cash (Standard HECM) or use your home equity to purchase another home (HECM for Purchase). Either way, you must meet the program’s guidelines which demand that you demonstrate that you are able and willing to meet your loan responsibilities. You will be obligated to pay the monthly interest payments, stay current on your homeowner’s insurance and property tax payments and maintain the home.

You must also pay the loan’s third-party costs which include an appraisal of the property, surveys, inspections, title search and insurance, recording fees, mortgage taxes, credit checks and monthly management fees.

The biggest benefit of this type of Reverse Mortgage is that you are protected, through the FHA’s insurance fund, if your lender is no longer able to carry your loan.

To qualify for a HECM loan you must

· be at least 62 years old.

· show proof that your home meets certain building requirements.

· have equity on your home.

· have undergone reverse mortgage counseling.

· show proof that you are able and willing to maintain the loan (good credit statement, past financial history, other income, etc)

Private (Proprietary) Reverse Mortgage

There are also non-FHA backed loans, commonly referred to as a private or proprietary reverse mortgage. These types of mortgages are solely based upon existing home equity and income and credit scores. They often come with higher interest rates and higher fees than the HECM loan because they are privately backed and are offered by private lenders.

Research all of your options if you are considering a reverse mortgage loan.

Consumer Financial Protection Bureau and Reverse Mortgage Advertising

Reverse mortgages are marketed to senior homeowners. These advertisements can be found on many major media channels including print, television, radio and internet. Oftentimes the advertisements feature celebrity spokespeople who describe these Reverse Mortgage loans in glowing terms.

The Consumer Financial Protection Bureau (CFPB) recently issued a report, based on their review of such advertisements. They examined marketing materials from a cross-section of lenders in five large urban U.S. markets. Among the CFPB’s findings:

Many of the ads were confusing and incomplete. They provided inaccurate information about borrower obligations, interest payments, government insurance, and general loan risks. In addition, many seniors who viewed the ads as part of the study’s focus groups were confused or had misconceptions about many of the features and terms of reverse mortgage loans.

For example, the CFPB study revealed that it was not clear to potential borrowers that the Reverse Mortgage must be repaid with interest. In addition, the role of the federal government, as an insurer of the reverse mortgage, was not understood, and many of the ads’ viewers believed, after watching the commercials, that the government offers protections for loan consumers that it, in fact, does not.

The report raised concerns among consumer advocates, specifically advocates for seniors. Reverse mortgages are complex loans and older, financially vulnerable homeowners can become trapped by the loan if they don’t understand all of their responsibilities under the loan and the loan’s implications. Reverse mortgages can help many older homeowners meet their financial needs. However, if used improperly, a reverse mortgage can jeopardize retirement security.

Reverse mortgage marketing promotes the use of mortgaging home equity as a way to supplement retirement income. It is, however, important that the advertisements not confuse or mislead prospective reverse mortgage borrowers, and that potential borrowers be fully aware of the terms and potential risks of the loans. In addition, there are costs to the loan which are not always spelled out. It can be difficult for even sophisticated consumers to estimate and understand the full implications of a HECM loan.

With the release of the report, the U.S. Department of Housing and Urban Development (HUD) began to take steps to address misleading or incomplete reverse mortgage marketing practices. HUD’s Mortgagee Letter 2014-10 (ML 2014-10), released in June of 2014, reminds lending institutions of the Federal Housing Administration’s (FHA) prohibitions of misleading or deceptive advertising.”

ML 2014-10 clarifies that the there are FHA prohibitions on using misleading or deceptive descriptions of Reverse Mortgages, also known as Home Equity Conversion Mortgages (HECMs).

The CFPB would like to see the following issues addressed:

1.The HECM loan is a LOAN, and, as with any loan, must be repaid. In the case of a HECM loan, the loan must be repaid when the borrower dies or leaves the property.

2. The borrower accepts obligations to maintain the loan. The borrower must commit to paying property taxes, homeowner’s insurance, home maintenance and the loan’s interest payments.  If the borrower does not maintain these payments, the loan may fall into default and the lending institution may foreclose.

3. There are third party costs to the loan, such as title search, origination fee, third party closing costs (title insurance, appraisal, recording fees, etc),  In addition, a credit check is done for every loan applicant, and the applicant must pay for this process as well.

4. Non-borrowing spouses may not automatically assume that they will stay in the home upon the death of the borrowing spouse. Presently, the process that a non-borrowing spouse must undergo to stay in the home is unclear and the matter is in the courts. It’s safe to say, however, that right now, the position of a non-borrowing spouse is not defined and the spouse’s position is shaky, at best.

Pay Attention to New Reverse Mortgage Rules, Protections and Cautions

The surviving spouses of HECM borrowers are now better protected against eviction. A rule, recently issued recently by the Federal Housing Administration, aims to clarify the steps that spouses need to take to prevent foreclosures. However, new study by the Consumer Financial Protection Bureau has determined that borrowers may still get into trouble due to potentially misleading advertising.

On June 12th 2015 the FHA announced a policy change that affects non-borrowing spouses of Reverse Mortgage borrowers. Potentially, any such spouse who is able to prove that s/he was legally married to the borrower, that s/he maintains primary residency in the home and has the legal right to stay in the home, will be able to continue to live in the home after the borrowing spouse dies. This is effective regardless of when the loan was made. According to the new rule, lending institutions can transfersuch loans to the Department of Housing and Urban Development upon the passing of the borrowing spouse. If the non-borrowing spouse agrees to accept responsibility for the tax, insurance and loan interest payments, s/he will be able to continue to live in the home. The surviving spouse must also commit to maintain the property as per the original agreement.

Reverse Mortgage Ads Continue to Confuse and Mislead

Reverse mortgages offer seniors, aged 62 or older, the opportunity to access the equity that they have on their home. Through the HECM loan the individual can take out a mortgage which is based on the equity.  Until the FHA revised its rule in June, Home Equity Conversion Mortgage contracts required that such loans be repaid upon death of the borrower. If only one spouse signed on the Reverse Mortgage, when s/he died, the house would revert back to the lender. If a second partner was still living in that house, the lender could foreclose on the mortgage and evict the non-borrowing spouse.

A Reverse mortgage loan can be a lifesaver. However, the costs of the loan, including origination fees, closing costs, and interest which must be paid monthly on the principal, make it questionable as to whether the loan is appropriate for everyone. In addition, there are still risks – if you don’t keep up on your property taxes, insurance payments or home maintenance, the lender may foreclose.

Recently, a Consumer Finance Protection Bureau study pointed out how reverse mortgage advertisements don’t fully disclose those risks. CFPB regulates loans and credit products and follows the process of the loans to ensure that they offer the public the best option possible for their needs. The CFPB report demonstrated that many ads for HECM loans are incomplete and sometimes don’t provide an accurate description of the loan. According to the report, key loan requirements “were often buried in fine print, if they were even mentioned at all.”

The CFPB report concluded that consumers have been – and still can be — misled into signing on a HECM loan even though they don’t fully understand all of the implications of the loan.

CFPB reminds potential borrowers to make full use of the counseling sessions, with HUD-approved counselors, that are mandated by the FHA. Read up on the loan even before you begin the application process so that you’ll know which questions to ask of the counselor.

It’s also a good idea to calculate your existing expenses. If a potential borrower can’t keep up with his property taxes, home maintenance and homeowners insurance, he could risk foreclosure by taking on a Reverse Mortgage.

New Forms and Rules are Designed to Protect Reverse Mortgage Borrowers Consumers

The Consumer Financial Protection has put together a summary of the new rules and forms that potential Reverse Mortgage borrowers will encounter, in order to better prepare these borrowers for the process ahead.

Some highlights of the new information:

New rules and forms are aimed at making mortgage information easier for borrowers to understand are scheduled. These new forms will debut on August 1st 2015. The new forms include a comparison of loan terms so that borrowers will be able to determine whether final terms are significantly different from a lender’s initial estimate.

The Dodd-Frank financial reform law, passed by Congress in 2013, directed the Consumer Financial Protection Bureau to combine older disclosure documents that had been required by two different federal laws. Forms based on the Truth in Lending Act and the Real Estate Settlement Procedures Act have not been organized anew and will be used for all HECM loan applications submitted on and after Aug. 1.

Andrew Pizor, a lawyer with the National Consumer Law Center,  said “The forms are going to look very different. They look a lot nicer and easier to understand.” Representatives of mortgage lenders also believe that the new forms are an improvement on the old forms because they have been designed to be complementary which allows borrowers to easily put them side by side for easy reference. “They can easily compare and see if anything has changed” one lender said when referring to these forms.

Under the new Reveres Mortgage rules, borrowers will receive a newly designed loan estimate no more than three days after submitting an application. The form with the estimate will include information such as the loan amount, interest rate, loan costs and monthly payment.

Then, at least three days before a closing is scheduled, applicants must receive a closing disclosure which will give them time to review the terms of the loan and ask questions. The five-page disclosure is intended to summarize the terms of the loan and list what the borrower will need to pay at closing. Currently, such information is often not shared with a borrower until just before or even at the closing, at a time when the borrower feels that he’s under pressure to sign documents and complete the loan and doesn’t have the time or the emotional strength to back out of the signing.

After that disclosure, if any items change — an increase in the annual percentage rate, an addition of a prepayment penalties or a move from a fixed-rate loan to an adjustable-rate loan — the borrower must be given an additional  three business days to review the loan terms.

The bureau finalized the new rules in late 2013 but delayed implementation until August 1st 2015 to give the mortgage industry time to prepare. Some lenders and other industry participants have indicated that they are worried that adoption of the new forms and rules may cause delays for borrowers. The CFP, however, believes that any disadvantages that are caused by the new forms and rules are more than compensated for by benefits to potential borrowers. Bureau director, Richard Cordray said that “most market players have put themselves in position to be ready by August, and others are getting ready as well.” Relating to lenders who are asking for a grace period to allow them to get used to these new rules, CFP officials are unsympathetic. “They have had a lot of time to get ready,” Pizor noted.

Don’t Apply for a Reverse Mortgage Until You Fully Understand the Loan’s Pros and Cons

You have probably seen ads that promote Reverse Mortgages. These ads seem to promise the moon, with headlines such as “A Reverse Mortgage Can Provide Financial Freedom for Your Retirement” and “A Reverse Mortgage can Revolutionize your Senior Years.” For individuals who are exploring the options of taking a Reverse Mortgage, it’s important to remember that ads are just that – advertisements which purport to provide potential borrowers with all of the reasons that they need to take out a Reverse Mortgage.

Many potential borrowers are so bowled over by the thought of obtaining cash based on the equity that they hold in their home that they forget that the ads only tell half the story. According to a recent study by the Consumer Financial Protection Bureau, most reverse mortgage ads leave out important information about the loan. In the best circumstances, seniors are confused, while in the worst case scenario, they think that the loan offers benefits which in reality are unattainable. These individuals aren’t sufficiently prepared for the obligations that they assume under the loan’s terms.

Here’s a summary of the Reverse Mortgage, including the pros and cons that you should consider before obtaining such a loan.

A reverse mortgage is a special type of loan which is available to homeowners aged 62 years or older. The loan allows borrowers to convert their home equity into cash. The loan’s balance becomes due, with interest, when the borrower dies, moves, or sells his/her house.

Some important points about the Reverse Mortgage:

*A reverse mortgage is a loan, not a benefit. The CFPB study shows that many seniors don’t understand this point, mainly due to the ads which imply that obtaining a Reverse Mortgage can assure the borrower financial security for the rest of his/her life. It’s important to understand that the terms of the loan state clearly that Reverse Mortgage borrowers maintain responsible for paying  homeowner’s insurance and property taxes after they’ve taken out the loan. They are still responsible for maintaining their property. Failing to meet these requirements, along with failure to pay the loan’s monthly interest charges, can trigger a loan default that will result in foreclosure.

*A reverse mortgage is not a government loan. Ads often leave seniors with the false impression that a reverse mortgage is a risk-free government benefit with federal protections. The lending institution, which is a commercial enterprise, originates the loan and collects its fees. The loan is insured by the Federal Housing Administration. This insurance protects the borrower in case a lender goes bankrupt and protects the lender in case the borrower defaults. But the FHA DOES NOT originate the loan, nor does it accept responsibility for borrowers who don’t meet their loan obligations.

*The requirements of the HECM loan are often unclear to the potential borrower. Many of the reverse mortgage ads that were reviewed by the CFPB did not mention critical information about the loan such as interest rates and repayment terms.

As you can see, it’s important that potential HECM (Home Equity Conversion Mortgage) borrowers and their families educate themselves on how the reverse mortgage really works. These mortgages are fairly complicated, and it’s important to understand the terms and risks.

Reverse Mortgages are particularly appropriate for:

1.A person who doesn’t qualify for a home equity loan or a line of credit – the looser credit and income requirements make it easier to get a reverse mortgage.

2.A person who has medical bills or other high expenses. A HECM loan can provide the cash flow needed to navigate such situations.

3.A person who has significant equity in his/her house and is older than the minimum eligible age. The more equity the person has in his house and the older he is at the time that s/he signs for the loan, the more money s/he can draw from a reverse mortgage.

4.A person/couple who have no heirs who will want the house upon the owner’s passing.

Reverse mortgages are complex but with proper understanding of the loan’s ins and outs, a borrower can make the Reverse Mortgage work for his/her benefit.

Why Are Reverse Mortgage Starts Increasing?

Reverse mortgages — technically known as Home Equity Conversion Mortgages or HECMs — seem to be advertised more frequently these days. Lending institutions confirm that there are, indeed, many more requests for information about Reverse Mortgages coming in to their companies.

There are a couple of reasons for this upsurge:

1. The population is aging. As more and more people are reaching retirement ages, the percentage of individuals who are looking for ways to increase their income is expanding. The equity that people have in their homes becomes a form of investment that they can liquidate and use.

2. The generation that is coming into retirement age is less prepared for retirement than were previous generations. Many of these people are carrying more debt into retirement than previous generations.

Gregg Dimkoff, a certified financial planner and professor of finance at Grand Valley State University’s Seidman College of Business, commented that, a generation or two ago, the general assumption in America was when your debts were paid off when you retired. And if they weren’t, you didn’t retire. That is no longer true today.

Dimkoff says that the percentage of all retirees who still have a mortgage is nearing the 50 percent mark. That’s ludicrous from a financial planning standpoint ” Dimkoff says.

The National Reverse Mortgage Lenders Association serves as an educational resource, policy advocate and public affairs center for reverse mortgage lenders and related professionals. According to the NRMLA, a reverse mortgage is a type of loan which is available to homeowners aged 62 or older, which allows them to convert part of the equity in their home into cash.

Reverse Mortgages were created by Congress and the Department of Housing and Urban Development as a means to help retirees with limited income use the equity that they’ve accumulated in their homes to cover basic monthly living expenses and pay for health care. The loan is called a reverse mortgage because instead of making monthly payments to a lending institution, as with a traditional mortgage, the lender makes payments to the borrower.

The borrower does not have to pay back the loan until the home is sold or the borrower leaves the home. As long as the borrower continues to reside in the home, s/he is not required to make any monthly payments toward the loan balance.

However, borrowers must remain current on homeowners insurance, condominium fees, property taxes and the monthly loan interest fees. If they don’t maintain these payments, they, in effect, default on the loan. The lender then has the same legal remedies for recovering the money as the lender has in a standard or “forward” mortgage — foreclosure.

Borrowers should remember that, under FHA rules, the loan comes due if the borrower leaves the house for 12 months or longer. This might happen if the borrower goes into a rehab facility. However, if the borrower spends several months in a rehab facility and then return to the home, it does not impact the reverse mortgage.

There is another aspect to reverse mortgages that are not included in forward mortgages: the HECM “no recourse” clause. This clause ensures that, for the purposes of the loan, the value of the home will never be less than the value of the loan upon closure. For example, if housing values plummet and the sale of the house will not cover the amount of the loan, the lender has no recourse against the borrower’s other assets. The difference is forgiven and is paid through the FHA’s insurance fund which is funded through the insurance premium that all Reverse Mortgage borrowers pay as part of their loan.

Reverse mortgages can seem complicated and some seniors find them difficult to fully understand. The HUD requires that potential borrowers attend a counseling session with a HUD-approved counselor BEFORE they begin the loan process to ensure that the potential borrowers fully understand the benefits and obligations of the loan.

Compare and Contrast Lending Institutions for the Best Reverse Mortgage Deal

Senior homeowners who want to explore the reverse mortgage market for the best deal — finding the lowest interest rate and origination fee – must know how to obtain the most updated and comprehensive data. Unlike the standard mortgage market in which price data is available from many sources, including 3rd party sources, multi-lender websites, prices are hard to find for the Reverse Mortgage market.

Few individual lenders spell out complete and up-to-date reverse mortgage prices on their websites. Senior financial counselors are aware of this and caution potential borrowers to carefully examine each lender’s fees before they sign on for a HECM loan.

Calculating the Loan

The most important source of reverse mortgage price data which seniors may access is the HECM calculator which estimates the proceeds that a borrower can expect to receive from his reverse mortgage. Even here, however, it’s a good idea to compare site calculators and even check the NRMLA (National Reverse Mortgage Lenders Association) calculator to get the best estimate of exactly how much one can expect to receive from his reverse mortgage loan.

For example, on November 21st, an individual aged 75 with a $200,000 existing mortgage balance on a home worth $500,000 could find the following prices NRMLA calculator: a 5.060 percent interest rate with a origination fee $6,000. Conversely however, one individual lender offers a publicized 4.25 percent interest rate with an origination fee of minus $2,015 – the “minus” rate means that the lender is offering a rebate that will be credited against settlement costs or the mortgage insurance premium.

These large price differences don’t result from any differences in investor risk, since all HECMs are insured against loss by FHA. There is no subprime versus prime distinction here. It’s important to note that price changes which occur while the loan is in process, on an individual lender’s site, will not be used to justify a price increase on the day that the price is locked. This indicates that it’s better to check prices on an individual lending institution’s site than on the NRMLA site.

Closing Costs

Many financial observers feel that Reverse Mortgage origination costs are high. Reverse Mortgage lenders profit on the sale of the mortgage, the size of which depends on the amount of the initial loan. If the profit on that loan is significantly large, competitive lenders will provide a negative origination fee (rebate) to cover the upfront mortgage insurance premium and other settlement costs. The result is a no-closing cost reverse mortgage.

If the profit on the home’s sale doesn’t cover all the costs, it may be large enough to justify a rebate to cover some of the costs. That would result in a low-closing cost reverse mortgage. Potential HECM borrowers should be aware of this option and, if their home’s worth is sufficiently large, should negotiate with the lender to obtain as big a rebate as possible. The rebate option, by the way, is not mentioned on the NRMLA calculator which assumes that the lender will be charging the highest origination fee allowed by law. So again, it is worthwhile to check out each individual lender’s calculator in order to obtain the most comprehensive overview of the true cost of the loan.

As in any consumer activity, obtaining a Reverse Mortgage Loan should be undertaken after research and price comparison.

Reverse Mortgages: Be Prepared

The image of an elderly man rocking on his front porch flashes across the television screen. The announcer tells us that this man is happily living off tax-free income, with no mortgage, for the rest of his life.

“You can do the same,” the announcer says as his voice rises enthusiastically “with a reverse mortgage.”

According to the advertisement,

* It’s safe (if done right)

* It’s inexpensive

* It’s simple

* Your heirs will not be obligated to pay back the loan

Lenders and senior advocacy groups agree that federally insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), can be advantageous. However, it’s important for potential borrowers to be prepared for the loan’s cons, as well as its pros.

New rules mean more protection for seniors but borrowers must do their research and work with a reputable lender and counselor.

The National Council on Aging offers detailed information about reverse mortgages.

Q. What is a reverse mortgage?

A. Home Equity Conversion Mortgages are for homeowners ages 62 and older. The mortgage allows borrowers to access the equity in their homes without making monthly mortgage payments.

Q. How much can be borrowed?

A. The loan amount is based on the value of the home and the age of the youngest borrower, minus insurance and finance fees (appraiser, escrows, title company, legal fees and county recorder), loan interest fees and, when necessary, a set-aside equity reserve.

Q. Does a borrower’s HECM income affect other benefits?

A. Reverse mortgage loan payments are not taxable and do not affect Social Security or Medicare benefits; they may, however, reduce SSI and Medicaid benefits.

Q. What are homeowner obligations under a reverse mortgage?

A. Homeowners retain title to the house. They must pay the property taxes and homeowner’s insurance and any home association dues. The property must be maintained. Homeowners insurance payments must be kept up to date.

Q. What is required to apply for a HECM loan?

A. Prospective borrowers must complete a reverse mortgage counseling session with a HUD-approved counselor.

Q. What should seniors review before they apply for a HECM loan?


  1. All other housing, social service, health and financial options.
  2. Other types of home equity conversion options such as HECM for purchase, sale-leaseback financing deferred payment loans, proprietary and private reverse mortgage and property tax deferral requests.
  3. Financial implications of entering into an HECM agreement

Q. Where can I get more information?

A. The National Council on Aging recommends the following sources for more information on using and protecting your home’s value, either with a Reverse Mortgage or with other programs:

· Home Equity Advisor

· BenefitsCheckUp

· Consumer Financial Protection Bureau

FHA HECM Guidelines Set to Propel Reverse Mortgage Industry Forward

The Federal Housing Authority’s Financial Assessment, which went into effect on April 27th, has altered home equity conversion mortgage underwriting procedures to resemble those used for forward mortgages. Seniors who want to borrow, based on the equity that they have in their home, will now have to prove, with documentation and paperwork, that they can handle the ongoing property costs. The financial assessments are viewed by the government and financial consultants as a positive change for the reverse mortgage industry. They argue that, in taking on many of the practices used in forward mortgage lending while slowing down the reverse mortgage application, lenders can prevent many defaults that might have otherwise occurred.

Up until recently, there were surprisingly few requirements for a senior to receive a Reverse Mortgage. The individual had to be 62 years of age or older and be the owner of a home which had been completely, or almost totally, paid off. Borrowers had to agree to continue to pay for all of the costs of operating a home including keeping up their homeowners insurance, and property taxes, paying for the loan’s interest and maintaining the home. Over the past several years, many borrowers failed to meet these responsibilities and they defaulted on the loan. As a result of the ensuring foreclosures the FHA’s insurance fund experienced a huge deficit and Congress debated the advisability of continuing with the HECM Loan.

Throughout 2013 Congress and HUD officials worked together to find a solution to the problem. The solution involved two main changes to the loan. One – there would no longer be an option for borrowers to draw all of their funds at once. And two – safeguards would be put into place to ensure that borrowers would be able to keep up their loan obligations.

Many consultants believe that forward mortgage practices should have been conducted all along by the reverse mortgage industry. Up until recently the only ongoing financial requirement that a reverse mortgage borrower had to agree to, by virtue of the mortgage agreement, related to home upkeep, taxes, loan interest and home insurance. The lack of requirement that borrowers would have the residual income to be able to pay those costs almost caused the collapse of the loan. Now that calculating residual income is required by HUD under the financial assessment, senior potential borrowers will be able to better decide whether they are viable candidates for such a loan.

Reverse lenders have an additional tool as well — the Life Expectancy Set-Aside – which functions similarly to an escrow account in requiring that a borrower set aside funds that will pay for property taxes and insurance over the course of the loan.

Industry analysts are aware that these new financial assessment requirements will pose a challenge, but they agree with HUD that they are necessary to the sustainability of the reverse mortgage program. As the policies become standard, borrowers, lenders and the government will gain and the reverse mortgage industry will be able to move into the future.

FHA Implementing Tougher Credit Standards for HECM Loans

Starting on April 27th 2015, the Federal Housing Administration (FHA) began implementing tougher credit standards for reverse mortgages.

Reverse mortgages are available for senior homeowners aged 62 and above who have equity in their homes which they want to use to obtain cash. A reverse mortgage may be applied to a primary residence. A borrower may convert part of the equity that he holds in the home into cash. Repayment of the mortgage loan or credit line is delayed until either the home is bought by another buyer, the borrower leaves the home or the borrower dies. Borrowers don’t pay income tax from money withdrawn from the reverse mortgage loan because it’s loan income.

The line of credit grows annually and can never be reduced or frozen. The borrower will never owe more than the value of the loan but if he wants to sell the house he must first repay the loan, including the interests and fees. If he repays these costs, he can then will the house to his heirs.

If the borrower dies, the heirs can buy the home at 95% of the property value, if that is less than the mortgage owed by the borrower upon the death of the borrower. FHA will then pay the loss via its Mortgage Insurance Premium.

The program has been a success since its inception in 1989 but in 2012 an audit of the FHA uncovered a huge deficit in Federal Housing Administration’s loan fund due, in a large part, to Reverse Mortgages. Many borrowers had fallen into foreclosure due to the borrowers’ failure to pay their interest, property taxes and insurance payments and/or to maintain the homes, forcing the FHA to take the loss. With the lowering of property values, the FHA’s loan fund incurred additional losses and the Treasury Department was forced to provide a $1.7 billion dollar bailout to save the program.

New rules, which were introduced on April 27, aim to correct this problem. Now reverse mortgage applicants must prove that they are willing and capable of meeting their obligations as borrowers. The loan now requires that potential borrowers be investigated and credit reports about their credit history be analyzed, similarly to the requirements for a first mortgage loan, before the loan is granted. The rules state that a potential borrower must demonstrate that s/he has been diligently paying real estate taxes, home association dues and other fees related to homeownership for at least the previous 2 years.  Employees will be asked to produce related documents and will undergo a “residual income” analysis to determine whether the person’s cash flow is sufficient for him/her to keep up with his loan obligations.

Senior rights advocates worry that many homeowners may not qualify for a reverse mortgage loan under these rules but, for the present, they offer the best alternative under which the HECM loan can continue to function.

Five Things that you Should Know About Reverse Mortgages

If you own your own home, you can access the equity that you have in your house to turn it into a pension. The Reverse Mortgage option gives you a tax-free monthly payout or a lump sum which you don’t need to repay until you die or sell your home.

According to the rules of the Home Equity Conversion Mortgage program, you can take out a Reverse Mortgage even if you still have a small balance left on your mortgage. You can use the cash for any purpose — medical expenses, living expenses or even a vacation.

You don’t have to repay the HECM loan until you die or sell the home. Even then, you’ll never owe more than the amount of the loan.

Yet there are several issues involved in Reverse Mortgages that many people don’t know. Here are five points that you should be aware of when you start to consider taking out a Reverse Mortgage.

  1. How much can you borrow? The amount of equity that you can access depends on your age, the current value of your home and the current interest rate. The maximum amount of home equity that is available in a federally insured Home Equity Conversion Mortgage is $625,000. To get an idea of how much money you could access, go to the Reverse Mortgage calculator and check out your eligibility. Alternately, sit down with an agent at a lending institution to find out how much money you can expect from a Reverse Mortgage and get more details about the loan.
  2. How much interest will be charged? The interest rate is fixed at the time you take out the reverse mortgage. You don’t have to actually pay the interest since it will accrue monthly and be added to the balance owed when the house is sold.
  3. What other fees are involved with a Reverse Mortgage? Borrowers should prepare for other fees that add to the balance of the loan. This is one of the reasons that you should only take out a reverse mortgage if you are planning to remain in your home. for a long time. Borrowers are responsible for paying a monthly fee for the up-front federal mortgage insurance premium (MIP). The MIP is designed to protect the lender against your longevity while, at the same time, protect you against owing more than the home is worth. This means that you will pay 0.5 percent of the funds that you withdraw in the first year. If you take more than 60 percent of the equity in a lump sum, upfront MIP is 2.5 percent. There’s an additional annual MIP premium which is equal to 1.25 percent of the outstanding loan balance. You’ll also be expected to pay a monthly servicing fee, closing costs (appraisal fees, title search, credit check, etc) and the cost of a one-time mandatory counseling session with a HUD-approved counselor.
  4. What other costs are involved in a HECM loan?  You are responsible for paying property taxes and homeowner’s insurance and for keeping the property in good repair and paying any assessments if you live in a condo.Your lender will do an assessment to ensure that your income can cover those expected expenses.
  5. What happens when your leave the house? When you die, sell the property or permanently move into a nursing home, the accrued balance will come due if there’s no co-borrowing spouse. The house will then be sold to repay the loan.

HECM Loans – Changes, Revisions, Today’s Situation and some Hints

The Home Equity Conversion Mortgage was introduced to the American market in 1989. The concept behind the HECM loan was that, in order to help seniors increase their income during their retirement years, the government, under the auspices of the Department of Housing and Urban Development, would help these individuals access the equity that they held in their homes.

According to statistics, most seniors own their own homes. Yet until the introduction of the HECM loan, they didn’t have any way to make their equity work for them. The government reckoned that, with a reverse mortgage loan, they would be able to draw money based on their home’s worth. Then, when the individual died or had to leave the home, the lending institution would claim the property, sell it and recoup their investment.

Over the years the terms of the Reverse Mortgage have been refined and changed. When it became clear that many seniors didn’t fully understand the loan, HUD instituted a counseling program under which all potential Reverse Mortgage borrowers would be obligated to sit with an HUD-approved counselor and receive a full overview of the loan from a non-biased third-party.

In 2012, an audit of the FHA uncovered a $16.3 billion dollar shortfall in the FHA’s insurance-fund. Of that, $2.8 billion was traced to the part of the fund that administered the Reverse Mortgage program. Industry analysts say that this shortfall was due to a loan structure that offered too many possibilities for foreclosure.

Upon close examination, it was determined that much of the problem could be attributed to borrowers’ misunderstandings about their obligations under the terms of the loan. HECM loans obligate the borrower to maintain the home for the time that he is living in it under the Reverse Mortgage – to pay for upkeep, property taxes, insurance payments and homeowner’s insurance, in addition to the loan’s interest payments.

Many of the foreclosures were attributed to borrowers’ lack of foresight – many people would draw our all of their Reverse Mortgage funds when the loan came through, use the money to pay off debts or for other expenses, and then be left without necessary capital to pay for the loan’s costs.

Over the last 2 years, Congress and HUD have been addressing this problem. Borrowers may no longer draw out all of their funds when the loan is issued and, when the lender deems it necessary, the borrower must allow the money to be put aside in escrow to pay for these costs.

Presently, HUD is dealing with a class action lawsuit, filed by the AARP, on behalf of non-borrowing spouses who claim that they were not fully informed about what might happen when a borrowing spouse dies while the non-borrowing spouse is still living in the house. Under the present terms of the HECM loan, the house reverts to the lender, but the AARP argues that, by not providing better information, HUD is responsible to see to it that the surviving spouses don’t suffer the foreclosure of their residence.

Reverse mortgage borrowers are at risk of falling prey to unscrupulous scam artists. The FBI reminds potential borrowers to keep scam artists at bay by remembering their rights. Potential borrowers should know that:

  • they may select their own mortgage counselor. Lenders may not promote one counselor over an other. They should make their own appointment and not allow any “consultant” to do that for them.
  • no one may take any money for any services until the counseling appointment takes place.
  • no agency, other than the FHA, insures Reverse Mortgages.

Non-Borrowing Spouse Rule – Where it Stands Today

In the ongoing saga of the HECM’s non-borrowing spouse rule, last week, the Department of Housing and Urban Development rescinded its August 2014 rule that was intended to keep as many non-borrowing Reverse Mortgage spouses as possible from being forced out of their homes upon the death of the borrowing spouse. Beginning in May 2015, spouses who had not been listed on the Reverse Mortgage will have more time to find alternative arrangements before the foreclosure process begins.

The issue has been dogging the HUD since 2012 when the AARP, in a class action suit, went to court to request relief on behalf of non-borrowing spouses who have been threatened with foreclosure following the deaths of their HECM-borrowing partners. The United States Court of Appeals sided with the AARP and demanded that HUD come up with a solution that would protect the rights of the spouses.

To answer the court’s demand, HUD revised its policy. In an amendment to the rule, HUD mandated a deferral of “due and payment status” for eligible non-borrowing spouses which would defer the foreclosure process/ The goal of this amendment involved giving surviving, non-borrowing spouses a period of time in which they would be able to gather their resources to determine how to meet Reverse Mortgage guidelines so that they can continue to live in their home.

As soon as the amendment was published, consumer advocates began to express concern that non-borrowing spouses would continue to face foreclosure and eviction after the borrowing spouse had passed away or left the house. A letter, “Regarding the Alternative Option for Claim Payment Announced in Mortgagee Letter 2015-03″ was submitted to HUD. The document involved a collaboration of the National Consumer Law Center on behalf of low-income clients who had turned to the NCLC for redress, the Consumers Union, the California Reinvestment Coalition, the Housing and Economic Rights Advocates, the Institute on Aging, and the National Housing Law Project.

In the letter, the groups pointed out that, even with the amendment, most surviving, non-borrowing spouses of borrowers will not even qualify for the benefits since reverse mortgages that originated prior to August 2014 did not take into account the surviving spouse’s age, which was generally younger than that of the borrower.

Under the amendment, in order for the non-borrowing spouse to qualify for HECM relief, the servicer must agree to assign the loan to HUD and to not pursue foreclosure.  In addition, the surviving spouse must be either older or the same age as the borrowing spouse, calculated based on the time that the loan was originated. If these conditions are not met, the surviving spouse must pay off the entire loan amount or 95 percent of the home’s value in order to continue to live in the home.

Such requirements keep many – if not most – surviving spouses from qualifying, the consumer groups say. In many cases the surviving spouse is younger than the non-surviving spouse and s/he doesn’t have the available money to pay such a large sum.

The consumer advocate organizations are frustrated because HUD is not revealing how many people are affected by this situation or by how many non-borrowing, surviving spouses are presently facing eviction and foreclosure.

An April report by the Consumer Financial Protection Bureau, which examined reverse mortgages, noted that issues of surviving, non-borrowing spouses who find themselves facing foreclosure upon the death of a borrowing spouse topped the list of concerns. The CFPB’s report summarized the two main issues: that some loan originators falsely assure borrowers that they will be able to add the other spouse to the loan at a later date, and that the loans can be difficult to repay.

HUD now requires that lenders consider the non-borrowing spouse’s age when originating a new HECM loan. This solves the problem for newly originated loans but it doesn’t resolve the problem of Reverse Mortgages that were originated before August 2014.