Advertisement
real estate

Reverse Mortgages Continue to Evolve

New changes designed to limit defaults on reverse mortgages could end up costing borrowers more.

With almost all new reverse mortgage loans backed by the federal government, Uncle Sam continues to wield his power to overhaul the Home Equity Conversion Mortgage, or HECM, program. The goal is to reduce a surprisingly high default rate on the loans—about 10%, far above the default rate on regular home mortgages.

The government hopes its new rules will help stabilize the HECM program and shore up the insurance fund the government uses to pay a lender if a house sells for less than the loan balance. Some of the latest proposed changes from the Department of Housing and Urban Development, laid out in mid May, could cost new borrowers more.

Advertisement - Article continues below

If a borrower doesn't have to make regular payments on a reverse mortgage, how can the loan go into default? Easy, if the borrower doesn't keep up to date with property taxes and homeowners insurance bills.

Under a change that went into effect last year, borrowers must prove they can afford the property taxes and insurance over the life of the loan. HUD now wants to add the cost of utilities to the list of property charges. And that addition would mean that failure to pay utilities could cause the loan to be in default, says Lori Trawinski, director of banking and finance at the AARP Public Policy Institute.

Advertisement
Advertisement - Article continues below

HUD doesn't want more folks kicked out of their homes. Adding utilities to the covered property charges means the financial ability to cover that cost must be considered in the financial assessment that borrowers must pass. The financial test looks at a borrower's credit and income to determine if the borrower can afford the property charges over the life of the loan. Failing the test doesn't necessarily disqualify a borrower, but it can reduce the amount of loan proceeds available.

Advertisement - Article continues below

When a shortfall is detected, the lender is required to carve out a "set aside" from the loan proceeds—effectively reducing the amount that can be tapped. For example, an 85-year-old who failed the test and whose taxes and insurance cost about $740 a month would have to set aside about $62,000 of proceeds to cover those bills. According to recent government data, a set-aside was required for about 10% of borrowers.

HUD's other proposed change that could affect new borrowers is a cap on adjustable-rate loans, which are now the most popular choice with borrowers, says Peter Bell, president of the National Reverse Mortgage Lenders Association. HUD proposes a one percentage point annual cap and a five percentage point lifetime cap on interest-rate changes for an adjustable loan. Currently, rates can rise by as much as ten percentage points over the life of the loan. If that proposal becomes a final rule, Bell says the lowered cap may cause lenders to charge a higher initial rate.

Advertisement - Article continues below

Adjustable-rate loans appeal to borrowers for two reasons: A borrower can tap up to 100% of eligible proceeds, compared with about 60% if they opt for a fixed-rate loan. And the adjustable-rate loan can be taken as a line of credit that can grow at the same interest rate being charged. For example, if you have $100,000 left in your line of credit and the interest rate is 5%, your credit line would increase by about $416 each month ($5,000 a year), says Cliff Auerswald, president of All Reverse Mortgage Company, in Orange, Cal.

Comparison Shop for a Loan

To get a reverse mortgage, you must be 62 or older. The loan is not repaid until the homeowner dies, sells the house or moves out for at least 12 months. The homeowner never owes more than what the home is worth.

Finding a specialized reverse mortgage lender may take some work. The big banks left the market after the financial crisis and have yet to come back. "There's no common household name," says Trawinski.

Start with the National Reverse Mortgage Lenders Association's "Lender Locator". Get quotes from several lenders—interest rates and closing costs will vary, says Auerswald. Download a helpful consumer guide at consumerfinance.gov.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
10 Tax Breaks for the Middle Class
tax deductions

10 Tax Breaks for the Middle Class

Tax breaks aren't just for the rich. There are plenty of them that are only available to middle- and low-income Americans.
June 30, 2020

Recommended

13 Tax Breaks for Homeowners and Home Buyers
income tax

13 Tax Breaks for Homeowners and Home Buyers

Owning (or buying) a home is expensive. But at least there are some tax deductions, credits, and exclusions that can help you recoup some of those cos…
June 22, 2020
12 Things Every Home Buyer Should Do
real estate

12 Things Every Home Buyer Should Do

Buying a home may be one of the biggest purchases you will ever make.
June 12, 2020
11 Things Every Home Seller Should Do
real estate

11 Things Every Home Seller Should Do

As a home seller, your goal is to sell your property quickly for the most money possible.
June 12, 2020
13 Reasons You Will Regret an RV in Retirement
retirement

13 Reasons You Will Regret an RV in Retirement

RV-loving retirees talk about the downsides of spending retirement in a motorhome, travel trailer, fifth wheel or other recreational vehicle.
June 8, 2020