Part of the Transforming Life as We Age Special Report
One way to supplement your income in retirement is about to become tougher. The Trump administration just announced new policies taking effect Oct. 2 that will increase the upfront cost of reverse mortgages for many borrowers and reduce the size of the loans.
If you’re 62 or older (the reverse mortgage age requirement) and have been thinking about converting your home equity into cash, you may want to apply for a reverse mortgage before the new rules kick in next month.
Smaller Reverse Mortgages, Bigger Upfront Premiums
“Many consumers getting reverse mortgages after Oct. 2 will get a lesser amount of money than before and, depending on how they draw out the money, will pay more in mortgage premiums,” said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association.
“The issue,” Bell added, “is that the [Home Equity Conversion Mortgage or HECM] program costs more to administer than the Trump administration feels is justified or that the premiums cover.” With a HECM reverse mortgage, you pay an FHA-approved lender an upfront fee and then have access to a percentage of your home equity. The loan is repaid when you move, sell the home, die or fail to pay property taxes or homeowners insurance to maintain the property. The maximum size of a reverse mortgage depends on your age, home value, interest rate and upfront costs.
Last year, the U.S. Department of Housing and Urban Development (HUD) said, the economic value of the government’s reverse mortgage program (part of HUD’s FHA) was a negative $7.7 billion.
Making the Federal HECM Reverse Mortgage Program ‘Viable’
Today, a HUD press release said, “younger, lower-income homeowners with traditional FHA-insured ‘forward mortgages’ are routinely bailing out the HECM program through the mortgage insurance premiums they pay.” Consequently, it added, the HECM program “can no longer remain viable in its present form.”
The planned changes to the reverse mortgage program “are huge; they’re very significant,” said Phil Stevenson, owner and principal of the reverse mortgage lender PS Financial Services and a Certified Reverse Mortgage Professional.
They also came as something of a surprise. “We had some inkling” that changes were afoot, Bell said. But HUD didn’t tell the reverse mortgage industry or consumers what was planned until the recent announcement was a fait accompli.
“You always expect the right to be less regulatory and for less government,” said Stevenson. “Now they are forcing our hand without even consulting the industry.”
Assuming the changes take effect as planned, Stevenson said, profit margins for reverse mortgages will shrink and lenders won’t be able to offer borrowers some deals they now do, such as subsidizing or lowering their closing costs, which can sometimes hit $20,000.
The Trump Administration’s Planned Changes for Reverse Mortgages
Here are the changes coming for loans made after Oct. 2:
There will be new limits on the total amount you can borrow through a reverse mortgage. Today, the average reverse mortgage borrower can draw 64 percent of home equity, but that will drop to about 58 percent, according to The Wall Street Journal.
The upfront mortgage insurance premium for most reverse mortgage borrowers will soar. Premiums for those taking less than 60 percent of the loan proceeds upfront will go from the current 0.5 percent to 2 percent of the “maximum claim amount.”
The upfront mortgage insurance premium will fall slightly for people taking more than 60 percent of the loan proceeds upfront. It will drop from 2.5 percent to 2.0 percent.
Annual mortgage insurance premiums will drop. The annual premium will fall from today’s 1.25 percent of the outstanding balance to 0.5 percent. This change “preserves more equity for borrowers over time by slowing the rate at which the loan balance grows,” the HUD press release said.
The reverse mortgage industry hopes to be able to work with HUD to prevent or scale back the upcoming changes and adopting other changes. “There are greater opportunities to make the program work efficiently rather than reduce the benefit to consumers and charge them more,” said Bell.
One idea the industry favors: finding ways to make the process quicker, less expensive and more efficient if a home with a reverse mortgage goes into foreclosure.
Rising Foreclosures Among Reverse Mortgage Borrowers
As The Washington Post reported last week, a growing number of older Americans are facing foreclosure after taking out reverse mortgages. Many can’t make the homeowners insurance and property tax payments. Some say they didn’t know they were responsible for them, some ran out of money, some think they’re being overcharged by loan servicers.
The Post said nearly 90,000 reverse mortgage loans were at least 12 months behind in payment of taxes and insurance and were expected to end in “involuntary termination” in fiscal 2017, more than double the number the year before. And more than 18 percent of reverse mortgage loans taken out from 2009 to June 2016 are expected to go into default.
The federal Consumer Finance Protection Bureau, in 2016, fined three companies a total of $790,000 for alleged false claims, saying they told reverse mortgage borrowers they wouldn’t have to make monthly payments or face foreclosure and didn’t tell them about the risks of failing to pay property taxes.
Beating the Oct. 2 Deadline
“The industry will try to accommodate as many people as possible before Oct. 2,” Bell said.
Some lenders are already working feverishly at this.
“I spent several hours making a ton of calls yesterday with our salesforce to tell people that if they’re on the fence about getting a reverse mortgage, see a HUD-approved reverse mortgage counselor,” said Stevenson. “As we get to the end of September, those appointments will be full.”
Finally, an important caution: Reverse mortgages aren’t appropriate for all homeowners. Their costs can be high and, as an excellent guide on the loans from the Consumer Financial Protection Bureau notes, the money is not free. The amount borrowed plus interest and fees must be repaid. Other home equity options, such as home equity loans or home equity lines of credit, could be less expensive.
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