New Reverse Mortgage Rules Cut Senior Options

Uncle Sam is about the only one willing to insure reverse mortgages but with losses to date of $2.8 billion HUD has now come out with new rules which will reduce withdrawals, require new financial paperwork and raise borrower costs. The new rules impact reverse loans made after September 30th.

In basic terms, reverse mortgages are a form of financing available to those aged 62 and older. Unlike a “forward” mortgage where the borrower makes monthly payments for principal and interest, a reverse loan is a type of asset-based financing: the borrower gets a loan according to how much equity they have in their home, the interest rate and their age. There are no monthly payments for principal and interest with a reverse mortgage, but borrowers must continue to pay for such things as insurance, taxes and HOA fees.

Interest accrues on the loan and the debt becomes payable after the borrower moves, sells the property or passes away. Importantly, the loan is secured by the property and the debt is a form of non-recourse financing. If the sale value of the property is less than the amount owed nothing except the home can be taken to satisfy the debt.

Under the new standards just announced by HUD, reverse mortgage loans — also known by HUD as home equity conversion mortgages (HECMs) — will be changed in several ways:

Less Cash Up Front

First, disbursements during the first year are generally limited to 60 percent of the loan amount (also known as the potential maximum claim amount or MCA). For instance, if the loan amount is $150,000 then borrowers can readily withdraw up to $90,000 during the first 12 months of the loan term. The purpose of this restriction is to assure additional funds remain available for such things as taxes and insurance.

Second, the size of the first-year withdrawals is tied to the up-front mortgage insurance premium charged by HUD. Withdraw 60 percent or less of the loan amount and the up-front fee is .5 percent of the appraised value. Withdraw more and the up-front fee jumps to 2.5 percent of the appraised value. For most would-be reverse mortgage borrowers the change effectively will result in higher up-front fees.

Notice that the property’s appraised value is far more than the allowable size of a reverse mortgage, especially under the new rules. Also, the new system replaces the existing reverse mortgage format which had a 2% up-front fee for the “standard” product and a 0.01 percent charge at closing for the “saver” plan. In June, the FHA reported that it insured 4,494 “standard” HECMs and 343 “saver” reverse loans.

Third, maximum loan sizes are being reduced by about 15 percent. This means there is a larger cushion to protect HUD in case home values go down or simply remain stable.

Financial Assessments

Fourth, starting January 14th borrowers will be required to have a financial assessment, essentially a loan application based on income and credit.

The financial assessment requirement is very different because previously lenders did not look at borrower income — reverse loans are asset-based loans. There is no doubt that the financial assessment process will evolve into a loan qualification test as lenders decide which borrowers such get reverse loans — and which should not.

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