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.