This article first appeared in the St. Louis Beacon, Sept. 26, 2013 - The rules are changing for federally insured reverse mortgages designed to enable older Americans to borrow from the equity in their homes without making payments. Lenders don’t collect on the loans until the houses are sold.
Reverse mortgages, which are restricted to homeowners age 62 and older, are complicated financial instruments, despite the TV commercials featuring graying actors, such as Robert Wagner, Henry "The Fonz” Winkler and former U.S. Sen. Fred Thompson, who tout them as simple solutions for budget-conscious seniors who want to stay in their own homes while living the good life.
That complexity will increase on Sept. 30 when the Federal Housing Administration (FHA) begins to put into place new regulations designed to lessen the likelihood of defaults and also shore up the insurance fund that backs the mortgages. The changes will decrease the total amount of home value that seniors will be allowed to tap into and will also limit the amount of cash they can access in the first year of a reverse mortgage.
"Overall, to protect the insurance pool, they’re going to give people less money,'' said Buz Zeman, director of the St. Louis nonprofit Housing Options Provided for the Elderly, one of the local agencies that provides counseling required for reverse mortgage applicants by the U.S. Department of Housing and Urban Development (HUD).
Housing counselors have been swamped with applications from homeowners trying to get reverse mortgages before the rules change, he said.
Lori Trawinski, a senior strategic policy adviser with AARP’s Public Policy Institute, said that borrowers will have access to about 15 percent less of their equity, and they will be paying a higher mortgage insurance premium if they need a lot of money up front.
An additional change scheduled to take place on Jan. 13 will require a financial assessment for homeowners that will determine their ability to avoid default because they are unable to pay expenses, such as property tax and insurance payments, or home maintenance.
Trawinski said AARP has expressed concern over Congress’ decision to authorize the agency to implement the new rules so quickly.
"When we were asked what we thought about HUD making changes to the program, we said we supported the idea of having a financial assessment and changes that will make the program stronger and more viable for the long term because we believe people should have access to reverse mortgages,” she said. "But we were not as excited about the idea of granting HUD authority to make the changes instantly. We believed that the changes should be put through the public rule-making process.”
How do reverse mortgages work?
By definition, reverse mortgages allow homeowners to borrow money against the value of their homes. No repayment of the mortgage, including principal or interest, is required until the borrower dies or the property is sold. The mortgage is structured so that the loan amount will not exceed the value of the home. It takes into account various factors, including initial mortgage amount, equity, length of the loan, the rate at which interest accrues, home price and appreciation.
Most reverse mortgages are federally insured Home Equity Conversion Mortgages, known as HECMs. These loans are originated by private lenders, administered by HUD and are insured through the FHA.
The goal, according to HUD, is to help seniors remain financially secure and independent by giving them access to the equity in their homes when their income is likely to be reduced by retirement and strained by higher medical expenses and the increased cost of living.
Reverse mortgages have been available for more than a decade but rose in popularity in 2008, when the deeply troubled U.S. mortgage industry found that they were a niche for continued growth. A record 114,692 HECMs were closed in 2012, according to statistics from the National Reverse Mortgage Association. The numbers have since leveled off. There were 54,822 HECMs closed in 2012 and about 28,000 through March of 2013. The fiscal year ends on Sept. 30.
Why the changes?
In a nutshell, defaults on HECMs have risen, most often because the borrowers have fallen behind on their payments of property taxes and homeowners insurance, which they are required to make. In June 2012, HUD estimated that about 58,000 active HECM loans -- about 10 percent -- were technically in default for nonpayment of property taxes or insurance.
In addition, the annual actuarial report found that HECM loans might face higher levels of default in the coming years, jeopardizing the viability of the Mutual Mortgage Insurance Fund. In November, HUD asked Congress for the ability to make quick changes to the reverse mortgage program. Congress approved the "The Reverse Mortgage Stabilization Act of 2013” in late July, and President Barack Obama signed it into law in August.
"A lot of the problems they’re facing are a result of the price declines in the housing market,” Trawinski said. "Tax and insurance default is part of the problem, but the bigger problem is overall price movement.”
The new rules also increase insurance rate premiums for borrowers who use more than 60 percent of the eligible value of the home in the first year of the loan and will also eliminate a fixed-rate loan.
"Lenders had started promoting a fixed-rate product that gave people more money but required them to draw out all the money at once,” Zeman said. "When that happened, we could see that the insurance pool would be more threatened because if people borrow more money right away and the debt accumulates faster they exceed the value of their home more quickly.”
Zeman said the new rules are designed to reward borrowers who are going to access the equity in their homes a little at a time. The rules won’t prohibit larger upfront borrowing, but those loans will cost more.
Trawinski and Zeman said a concern for future borrowers is the financial assessments that will be required in January because the guidelines have not yet been announced.
In its announcement of the rules, FHA said the goal is to ensure that homeowners can afford home upkeep and costs based on all their income sources, including pension, Social Security and retirement funds. For some borrowers that could include costs like car payments and alimony.
"They will be examining cash flow and credit histories, and so loans will become more difficult to obtain for people who have had credit history problems,” Trawinsky said. "The difficulty here is we don’t really have detailed data on people who have gotten reverse mortgages in the past so we don’t have a way to study the people who went into default. We in the research community are not going to know what the impact of the changes will be until after the fact.”
What will changes mean for borrowers?
Some consumer advocates warn that the new guidelines will mean that reverse mortgages are no longer a financial solution for some borrowers, including unemployed baby boomers with large debts.
"The changes that take effect next week will potentially cut some out of the market because they may have needed more proceeds than they can get under the new products,’’ Trawinsky said. "Come January, another group will be cut out of the market because they won’t be able to meet the financial assessment requirements.”
Zeman said the rules will definitely have an impact.
"We don’t know how dramatic it’s going to be, but it’s going to very significantly become a product for the more well-to-do rather than the less well-to-do,” Zeman said.
Trawinsky and Zeman stressed the importance of borrowers understanding how reverse mortgages work.
"We have always encouraged people to make sure they fully understand that this is, in fact, a loan. Part of the housing counseling that we have strongly supported is that certain topics must be covered. One of them is the consideration of other possible alternatives. If there’s another way you might be able to manage your financial situation you should at least consider it,” Trawinsky said. "We believe these loans are appropriate for some people, but we don’t believe they’re appropriate for everybody. If you fail to meet the obligations you could end up in foreclosure."
Zeman said that while reverse mortgages have relatively large upfront costs, the costs are reasonable over a long period of time.
"You read one article that says they’re good and one article that says they’re terrible. They’re neither good nor bad,” he said. "For a given individual, they could be the best thing since sliced bread, or they could be the worst thing.”
Zeman finds it amusing to see a wealthy actor like Robert Wagner promoting reverse mortgages.
"Very rich people are unlikely to do these loans,” he said. "As a huge generality, if you’re going to leave more than the value of your home to your kids, these probably don’t make sense financially. Mostly, these are people who need some additional income to make it in their current living arrangement. In counseling, I ask, 'Do you really want to borrow money you don’t have to borrow?' If you have other assets it might make sense to use those other assets first.”
Resources
* The congressional testimony of Lori A. Trawinski, a senior strategic policy adviser with AARP
* Consumer guide on reverse mortgages by AARP
* HUD consumer information
* HUD’s explanation of the changes
