Reverse Mortgage Borrowers Face New Rules Effective October 2, 2017

The Trump Administration has rolled out new rules for federally backed HECM (Home Equity Conversion Mortgage) reverse mortgages.  The new rules go into effect October 2, 2017 and will affect new borrowers only. A reverse mortgage allows a person age 62 and over to borrow against his/her home’s equity without having to pay back the loan until the borrower moves, passes away or sells. Many seniors with equity in their homes turn to reverse mortgages to generate needed cash in retirement.

For the typical borrower, the new rules increase the upfront cost of the loan while decreasing the amount of funds available. The main changes are:

• The initial mortgage insurance premium for all borrowers will be 2%. Prior to the new rule, borrowers tapping less than 60% of home equity in the first year paid an initial premium of .5%, and those borrowing more than 60% paid 2.5%.

• For all borrowers, the ongoing annual premium will drop  from 1.25% to .5% of the outstanding mortgage balance.

• The amount that borrowers may access, while still pegged to age and ongoing interest rates, will decline for most. At current interest rates, the average borrower will be able to tap about 58% of the value of the home, down from 64%.

According to the Department of Housing and Urban Development, these changes are needed to ensure the continued viability of the federal reverse mortgage program. Last year, the program was $7.7 billion in the red. Without these changes, a bailout from Congress would be necessary.

Seniors should exercise caution when considering a reverse mortgage. Without sufficient information, a reverse mortgage can place a borrower in significant financial peril. Read more about deceptive reverse mortgage advertising here.


Read more about the October 2 changes to the HECM program here. 


Read HUD information on federally backed reverse mortgages here.

Beware deceptive reverse mortgage advertising

If you are over 62 and have equity in your home, a reverse mortgage can be a financial lifesaver. But if you misunderstand what you're getting into, it can sink your ship. According to a recently concluded Consumer Financial Protection Bureau study, deceptive and ambiguous advertising is one reason many consumers don't get the full picture.

The study found that American Advisors Group, Aegean Financial, and Reverse Mortgage Solutions used language that implies monthly payments are eliminated when you take out a reverse mortgage. That's false: you still must pay taxes and insurance, or lose your home.

The CFPB also claims that Aegean Financial falsely told potential customers that there are no costs when refinancing a reverse mortgage, and that Reverse Mortgage Solutions gave consumers the impression that heirs can inherit the home (that's possible only if heirs pay off the reverse mortgage or 95% of the home's assessed value). Reverse Mortgage Solutions' phone agents also reportedly pressured prospects, telling them they needed to act quickly or their file would be closed and their application denied.

American Advisors Group faces a fine of $400,000; Reverse Mortgage Solutions, $325,000; and Aegean Financial, $65,000.

I cannot stress enough the importance of understanding the financial realities behind the reverse mortgage so that you can make an informed decision. Please check out prior posts on this topic here  and here.

Good reverse mortgage news, but caution still advised

In my September 2014 post I told you about a change in HECM reverse mortgage regulations. That change eliminated the requirement that the non-borrower spouse pay the loan in full when the borrower dies. The new rule eliminated the threat of foreclosure for surviving non-borrower spouses, provided they continue to pay required tax and insurance on the property. 

Unfortunately, there was a BIG fly in the ointment: The new rule applied only to reverse mortgages assigned case numbers on or after August 4, 2014. That still left many non-borrower spouses at risk of being thrown out of their homes. To remedy that situation, HUD has now expanded the new policy to include reverse mortgages initiated even before August 4, 2014. You can read the new rule here.

This new ruling helps revamp the much-troubled reverse mortgage industry, as do the stricter eligibility critera for HECM loans introduced earlier this year. But caution is still in order. Beneficial under the right circumstances, taking out a reverse mortgage can wreck your financial security if you don't know all the facts ahead of time. Risks and rewards must be carefully evaluated and coordinated with your overall  estate plan. 

And those ubiquitous ads for reverse mortgages? Well, they do little to educate the public about the product's complexity. According to a recent study from the Consumer Financial Protection Bureau, such ads often contain statements that are incomplete or just plain inaccurate. The report also presents a good general introduction to the product and its risks and rewards. It's worth reading if you are considering a reverse mortgage. Read it  here.

Reverse mortgages tougher to qualify for beginning April 27, 2015

Starting April 27, 2015, it will be more difficult to qualify for a federally insured reverse mortgage (HECM, the Home Equity Conversion Mortgage). Every prospective borrower will be subject to a financial assessment test to determine if he/she has sufficient ability to pay the real estate taxes and insurance on their homes. The applicant's credit history, debt structure, Social Security and other sources of income will be examined. Previously, only the value of the home, the current interest rate, and the age of the borrower were considered. You must be 62 or older to be eligible for a HECM.

Borrowers who do not pass the financial assessment will be denied the loan, or in some cases, could be allowed to set aside a portion of the loan proceeds to cover taxes and insurance. The set-aside may be fully funded and based on the life expectancy of the youngest borrower, or partially funded. In either case, the set-aside percentage is expected to be steep, so much so that in many cases the loan will be impractical. Click here to learn more about set-asides. (Note the article states March 2 as the effective date of the new rule, but that is incorrect: it is April 27.)

The new rule is the federal government's response to the sharp increase in the default rate in recent years. Some elderly borrowers who have been unable to pay property taxes and insurance have actually been foreclosed on and evicted from their homes.

These tougher eligibility requirement are just the latest in a series of new rules that have been instituted to address a variety of problems plaguing the reverse mortgage market over the years. Last year, for example, the rules changed in order to prevent the non-borrowing spouse from being evicted when the borrower spouse passed away.

Anyone who is considering a reverse mortgage should also be aware that securing a reverse mortgage can impact one's eligibility for means-tested programs such as SSI or Medicaid. Always check with a Certified Elder Law Attorney before taking any steps.

Read more about reverse mortgages at the HUD website.

New reverse mortgage rule to protect non-borrower spouse

The Department of Housing and Urban Development has issued a new rule to protect spouses of reverse mortgage holders from eviction after the borrower passes away. 

To qualify for a Home Equity Conversion Mortgage (HECM), the most popular type of reverse mortgage, a homeowner must be age 62 or older. In the past, if a HECM borrower had a spouse under age 62, the spouse had to be left off the loan. Even if both spouses were over 62, the younger spouse  was often omitted from the loan because that enabled the homeowner to borrow more money. The amount that can be borrowed increases with the age of the borrower. 

The problem: Under those rules, the younger non-borrower spouse could end up evicted from the home when the borrower spouse died. Why? Because at the death of the borrower, the younger spouse who wanted to remain in the home was required to pay the loan in full. This was not possible in many cases, particularly given the recent financial crisis that pushed property values below the loan amount. 

HUD's new rule is aimed at better protecting younger spouses from being evicted from their homes. Effective August 4, 2014, a spouse over 62 who takes out a reverse mortgage may list a younger spouse as a "non-borrowing spouse." Should the borrower die first, the non-borrowing spouse will be entitled to remain in the home if two conditions are met: 

• The non-borrowing spouse must provide proof within 90 days of the spouse's death that he/she is entitled to remain in the home. Documentation may include a lease, deed, etc. 

• The non-borrowing spouse must continue to meet all other financial obligations associated with the reverse mortgage - pay property taxes, pay insurance premiums, etc. 

This is good news, but pay attention to these three important caveats:

1. Unlike the borrower, the non-borrowing spouse may not access the loan balance. 
2. The new rule applies only to non-borrowing spouses who were married to the borrowing spouse at origination of the loan. Spouses who marry the borrower after the loan is taken out are not protected. 
3. The amount of the reverse mortgage will now be based on the age of the younger spouse, hence less money will be available the borrower.

To read the new HUD rule in its entirety, click here. 

Many of my clients who need cash have found the reverse mortgage to be a useful tool - a lifesaver, even. But approached without full awareness of its financial and legal implications, a reverse mortgage can become a nightmare. The process is not the cakewalk or panacea some television commercials would have you believe. As with any financial product, you should do your homework and proceed with caution.

Reverse mortgages: new rules, always coordinate with your estate plan and long-term care plan

Reverse mortgages have been a boon for some of my Florida clients who need cash during their retirement. The financial crash of 2008, more retirement years, the increased chance of extended disability, and of course the high course of health care have fueled the popularity of reverse mortgages in recent years. That popularity, however, has come at a price. In recent years an increasing number of the loans have gone into default as seniors have increasingly found themselves unable to keep up with their home's property taxes and insurance premiums. So rather than allowing these seniors to remain in their homes, the loan has only delayed the process of losing it. According to a Feb 2013 report to the House Financial Services Committee, projected losses for the nation's reverse mortgage program stood at $2.8 billion as of 2012.

In April, I told you about the Federal Housing Authority's new rules under the Reverse Mortgage Stabilization Act of 2013, designed to protect borrowers as well as maintain the solvency of the ailing government-backed HECM (Home Equity Conversion Mortgage) program. More rules were put in place effective September 30, and even more are on the way next year.  The FHA's new rules are aimed at making sure seniors borrow only what they need and can afford. 

What is a reverse mortgage and who qualifies? 

To qualify for a reverse mortgage, you must be 62 or older. A reverse mortgage allows a senior to borrow against the equity in his/her home - often a senior's most valuable asset - without having to pay off the loan until he/she moves, passes away, or sells.

Changes that went into effect on April 1, 2013:

 

The fixed rate HECM Standard mortgage was discontinued, and a new program, the HECM fixed rate saver mortgage, was put in place. The new program requires seniors who wish to have a fixed-rate loan to apply for the rate saver mortgage, which provides a smaller payout from the borrower's home equity, although the up-front costs are lower. The Upfront Mortgage Insurance Premium is .01% of the lesser of the appraised value or current $625,000 lending limit.

 

Changes that went into effect September 30, 2013:

 

• Smaller Loans: Borrowers used to be able to take up to 61.9% of the home's value. That has now been reduced by 15%.

• First-year limit: No more than 60% of the available funds may be withdrawn during the first year.

• Fees: The up-front fee is .5% of the appraised value of the home. For seniors who for various reasons wish to take out more than 60% of the value of their home, the up-front fee is 2.5%.

 

Changes that will go into effect January 13, 2014: 

 

Starting in January, would-be borrowers will face tougher scrutiny  to determine if they can handle the costs of property taxes, property insurance, and maintenance on their home. Income and credit history will be examined. If the borrower does not have sufficient funds each month to handle the obligations, he will be required to make a cash set-aside that may be drawn from payments or charged to a line of credit.

Check out the FHA website for more information on reverse mortgages.

Taking out a reverse mortgage has serious economic ramifications. It is certainly not for everyone, and must only be done with an abundance of caution and serious analysis. It must also be carefully calibrated with your estate planing and your long-term care planning to avoid possible negative consequences. Contact us for assistance.

Federally insured reverse mortgage rules are getting a makeover.

If you are considering applying for a reverse mortgage, take note: The Federal Housing Authority has made changes to its Home Equity Conversion Mortgage program (HECM) effective April 1, 2013. 

Private lenders offer reverse mortgages, but almost all reverse mortgages are federally insured by HECM. Seniors must be age 62 or older and own their own homes to qualify for a reverse mortgage. The cash can help seniors with living expenses, payment of an existing mortgage or other debts, etc. Some of my clients have used reverse mortgage money to pay the premiums on long-term care insurance.

Starting April 1, the fixed rate HECM Standard mortgage will be discontinued. The program is being suspended because of the increasing number of borrowers who are unable to keep up with the required property taxes and insurance payments, sending a record percentage of loans into default. According to a Feb 2013 report to the House Financial Services Committee, projected losses for the nation's reverse mortgage program stood at $2.8 billion as of 2012.

Starting April 1, seniors who want to tap their home's equity using a reverse mortgage and who desire the predictability of a fixed rate loan must apply for a HECM Fixed Rate Saver Mortgage. This more conservative program provides a smaller payout from the borrower's home equity, although the up-front costs are lower. The Upfront Mortgage Insurance Premium is .01% of the lesser of the appraised value or current $625,000 lending limit.  

Seniors will see see more changes in the near future as the Department of Housing and Urban Development continues stabilizing the HECM program. Among the anticipated modifications: providing administrators of estates with incentives to sell the property of a deceased borrower, rather than convey the property to the Federal Housing Authority which must then shoulder the expense of liquidating the property. Another slated change: more intensive counseling of prospective borrowers, to ensure that a reverse mortgage is truly suitable for their situation.

If you own your own home, are at least age 62 and want to explore how a reverse mortgage may benefit you,  contact us. We can refer you to a reputable financial professional as well as advise you about how a reverse mortgage can be coordinated with your Florida estate planning. Reverse mortgages can be useful tools, but their complexity requires a thorough analysis before you take the plunge.

Read more about the changes to the federal HECM program here.

Read the National Council on Aging's 2013 booklet on reverse mortgage basics.