New Reverse Mortgage Rules
On October 2, 2017, the rules relating to reverse mortgages changed. Borrowing limits decreased and upfront costs increased.
First, let’s start with a basic definition of a reverse mortgage. Admittedly, this is something that many people have heard about, but perhaps it is not very well understood. As the name indicates, a reverse mortgage is a mortgage in reverse (pretty clear, right)? For people who are age sixty-two or more, it provides a mechanism for using their residence as collateral for a loan which pays monthly, as a one-time payment or as a line of credit.
While that may seem to be a fairly basic concept, as with other types of loans and financial products, reverse mortgages can come in many different shapes, sizes, and flavors. Most often it is a senior citizen who is the borrower under these arrangements (yes, age sixty-two is the minimum age, a very large percentage of those who obtain a reverse mortgage are much older). Without being insensitive to the mental acuity of senior citizens (certain that is not what is intended), the reality is that many of these elderly borrowers under reverse mortgage programs are not fully educated about what they are getting themselves into; they do not fully appreciate how such programs work or the downsides of the same. What is the worst that can happen? The worst situation is where there is a default under the loan and/or a failure to remain current with property taxes, and the borrower (i.e., elder person) loses their home.
It is estimated that about twenty percent (20%) of the reverse mortgages originated between the year 2009 and 2016 are in default currently or will soon be in default. Thus, that worst-case scenario described above may become a common occurrence, unfortunately. We also know that often these reverse mortgage arrangements result in estates being left to pay for mortgage deficiencies. Surely, neither of these are desired or intended outcomes.
Before obtaining a reverse mortgage, the potential borrower(s) must meet with a HUD-approved reverse mortgage counselor. This administrative requirement is intended to ensure that elderly persons are given a full opportunity to understand what they are getting into and what will happen if they do not meet their end of the bargain. But again, whether there is a lack of adequate information and education on the front end through these mortgage counselors or not, a very high percentage of reverse mortgage arrangements fail (at least from the perspective of the borrowers).
Under the new reverse mortgage rules, which took effect yesterday (October 2), a homeowner will not be able to borrow as much as previously. Further, the borrower will have to pay more in mortgage insurance on their loans.
- Prior to the new regime, a reverse mortgage borrower could obtain as much as sixty-four percent (64%) of the value of their equity in the home. Now, that limit is generally decreased to approximately fifty-eight percent (58%).
- Previously, the upfront mortgage insurance premium averaged about one-half of a percent (0.5%) of the maximum claim amount. Now, that amount will increase to about two percent (2%). These numbers relate to those who are borrowing less than sixty percent (60%) of their home equity value.
The hope is that by limiting the amount that can be borrowed via reverse mortgages going forward (i.e., less indebtedness), there will be a reduction in the number and frequency of defaults. Is that going to be the reality? Time will tell.
Given the growing popularity of reverse mortgage programs among the senior citizens, and given that our senior citizen population continues to increase with the passage of time, it is likely that even with these new rules and regulations, reverse mortgages will continue to be a very commonly used tool. As with all things relating to loans and financial planning, please be sure that you are given proper advice and disclosures so that you can make wise decisions for your situation.