New Housing Bill Makes Substantial Changes To Reverse Mortgage Program

Posted on August 11, 2008.

Publisher: SeniorJournal.com

Reverse mortgages were not part of the problem in the current home financing debacle but Congress decided to make some changes, while they were trying to create a bill to stop the slide of the housing market and collapse of mortgage companies. The government has, among other things, raised the allowable limits on these FHA backed reverse mortgages to $417,000, up from about $362,000.

The limit can be increased to $625,000 if the borrower lives in a high housing-cost area.

The Housing and Economic Recovery Act that becomes effective in October "makes it easier and less expensive for seniors to access the cash value of their homes on a tax-free basis through a reverse mortgage, and expands the amount that can be borrowed," writes Terry Savage, who frequently appears in publications and on television as an expert on personal finance.

Writing in TheStree.com, August 3, she said:

"Reverse mortgages had nothing to do with the mortgage mess -- they are a safe and easy way for homeowners age 62 and older to maintain control and ownership, while tapping their home equity for tax-free cash.

"Now there will be a higher borrowing level on FHA reverse mortgages -- with $625,000 of home value as a cap, and a $417,000 borrowing limit. Fees will be capped at 2% of the first $200,000 borrowed, and 1% on the balance -- with an absolute maximum of $6,000 in fees.

"These rules apply to FHA mortgages, which insure the lender against the possibility that the homeowners will stick around far longer than anticipated!

"Other lenders provide "jumbo" reverse mortgages for higher amounts, taking larger fees to offset their risk. But there is no risk to the homeowner, who gets the money -- and the house -- for as long as the owner chooses to live there."

Savage writes, "A reverse mortgage may be the perfect answer for seniors who want to stay in their homes, but have a cash flow problem. They can get a monthly stream of tax-free income, or a lump sum, and it's tax-free. Their ability to access the equity in their home does not depend on their ability to repay, as in the case of a home equity loan.

"Reverse mortgages were largely created for seniors who are cash-poor and house-rich - meaning they have a lot of equity in their homes but little or no savings," writes Michelle Singletary, a personal finance columnist for The Washington Post.

What Singletary likes best about the new law is that it reduces fees on this type of loan. He also sees new protection for senior citizens in the bill.

New protections for senior citizens

He also points out that "except for title insurance, hazard, flood, or other such products, lenders are prohibited from requiring borrowers to purchase insurance, annuities or other similar products as a condition of getting a reverse mortgage.

"The law also restricts individuals who are originating reverse mortgages from working with, employing or providing incentives to other professionals trying to sell seniors other financial products as part of application process.

"Part of the reason the housing act included a provision for reverse mortgages was out of concern that seniors were inappropriately - and sometimes fraudulently - being sold other financial products."

In the article carried by ProJo.com, he says, "In some cases, seniors have been encouraged to use the proceeds for their reverse mortgage to buy annuities or long-term care insurance. The Financial Industry Regulatory Authority (FINRA), which regulates the securities industry, has issued several warnings about reverse mortgages, particularly cautioning seniors about doing business with financial professionals who want them to obtain a reverse mortgage in order to fund a particular investment product."

Many others, however, are not as enthusiastic as Savage and Singletary.

There are a number of problems

Author Dan Solin says, "While reverse mortgages can be a valuable source of cash for seniors, there are a number of problems with them.

"The fees are very high. Typical fees for a reverse mortgage on a $250,000 home can exceed $25,000," he says.

He also points out that interest charges are added every year the loan remains outstanding.

"While you may not care as long as you get your money, you should realize that the diminution in the remaining equity in your home will affect the money you will receive if you sell your house and the amount of money your heirs will receive upon your death," he says.

Solin sees the reverse mortgage is "particularly ill-suited" for those who will only remain in their homes for a "relatively short period of time."

He also cautions that if a seniors financial situation causes them to rely on government programs (like Medicaid), the receipt of proceeds from a reverse mortgage may cause them to fail to continue to qualify for these programs.

He also reminds seniors that a reverse mortgage does not alter your obligation to maintain your home, pay property taxes and insurance.

"Before committing to a reverse mortgage, seek financial counseling," he says. It is required for FHA-insured reverse mortgages, but even if you are considering private reverse mortgages, it is critically important that you understand the full financial ramifications of these loans.

Another expert that urges caution on senior citizens is Frank N. Darras, who claims to be the nation's leading disability and Long-Term Care insurance lawyer.

Reverse lenders reignite their marketing programs

"When the President signed into law a $300 billion housing bill to help homeowners renegotiate their mortgages, reverse mortgage lenders reignited their marketing programs focusing on seniors, says Darras.

Darras says the intrigue of reverse mortgages has been that as you age, you can have "your house pay you." The convincing argument is that reverse mortgages can be used to pay for living expenses, prescription drugs, health care, or to pay off an existing mortgage.

Reverse mortgages are actually, in legal terminology, Home Equity Conversion Mortgages (HECMs) and are insured by the Federal Housing Administration. HECMs allows folks to tap home equity and not have to make monthly payments. The HECM has been limited to the value reflected in a home's appraisal. The range and loan limits were, before the new law, between $200,160 and $362,790, depending on the location of the home.

Darras says lenders are dangling a golden carrot with phrases like "Seniors may be able to borrow as much as $625K in home equity to use any way they please!"

"Be very careful," warns Darras. "Rising costs on a fixed income can be a dangerous combination. Don't let fear and the lure of an easy solution drive your decision. The new legislation is promising to make it less expensive to borrow but it can cost you in the long run, if you are not careful."

Keep in mind that the amount of your loan will depend on the home's value, location, interest rates and the age of the youngest borrower on the note. Also remember, even though the loan will come due only when you die, sell or move away permanently, it will have to be repaid somehow. Are you setting up a financial disaster that could wipe out your life's savings, your estate and leave heirs with financial obligations they cannot meet?

If you are not sure about taking out that reverse mortgage, wait until the new law comes into affect in October and more protections are in place to protect you.

"These days, the rest of your life can be 30-40 years, so make your decisions carefully, regardless of great marketing, fancy brochures and short-term fixes," says Darras.