April 19th, 2016
Continuing our look at the history of the Reverse Mortgage, let’s take a look at the most recent, sweeping changes to the program and how it affects the homeowner.
Changes to the HECM (Home Equity Conversion Mortgage – the FHA-backed reverse mortgage) were made to protect both the homeowner as well as FHA , who ultimately insurances the program. Non-borrowing spouse, ability to keep taxes and insurance current, the amount of the home equity are all issues that have been addressed with the recent program changes.
What is a non-borrowing spouse? If one member of a married couple has not reached the age of 62, the homeowners can still obtain a reverse mortgage – now, without removing the younger spouse from the title. In the past, borrowers would consider this or removing a spouse from the title for other reasons to be able to take advantage of the HECM program. The problems would arise when the borrower died or left the home permanently. At that point, the HECM became due, leaving the surviving spouse searching for a source to pay off the loan, or, at worst, looking for a new home. Changes to the program now account for the non-borrowing spouse at the origination of the loan and make provisions for the spouse to be able to remain in the home until the survivor permanently leaves the home. This change helps to alleviate one of the biggest concerns many attributed to the program.
The Financial Assessment (FA) was added to the HECM program in April of 2015. To combat the higher default rate of reverse mortgages due to unpaid taxes and property insurance, FHA added an analysis of debts, payment history, and debt ratios. In reviewing these items, the lenders can determine whether the borrower has the capacity and willingness to keep real estate taxes and property insurance current. The FA is not as stringent as the review process to obtain a regular, “forward” mortgage, but it still may prohibit some from getting a reverse mortgage. However, this could be a good thing – no one wants to set up any homeowners to eventually fail and lose their home. OR, some who may have had issues keeping these items current, may be able to take out a HECM with a set-aside of some of the proceeds to ensure payment of these items.
Change has also affected the amount of money that a homeowner may receive at closing in two primary ways. The first involves the actual loan-to-value considered when the homeowner applies. The amount that can be borrowed, the “principal limit”, is based on the age of the youngest borrower, the interest rate, and the value of the home. The new computations allow for a more conservative loan-to-value than was available in the Standard loan programs of the past. This adjustment was in answer to the real estate collapse of property values and is intended to more reasonably reflect the predicted balance of the loan and the value of the property when the homeowner leaves the home. In addition, unless the funds are needed for mandatory payments (satisfaction of mortgages, liens, etc.), the borrower can take no more than 60% of the principal limit at the closing of the loan. The remaining money becomes available one year from the closing date. Why not allow all of the money to be dispersed at closing? Review of loans that were in default showed that many had taken all of the funds available at closing. When financial needs emerged later, the homeowner had no additional funds or equity to help meet these needs. The limit was added as a protection to the homeowner – to help preserve funds for future needs.
There have been many other changes to the HECM program over the years – some of the same areas have changed more than once. All of the changes are meant to make the HECM a safer loan for the consumer as well as for the FHA to continue insuring the program.
The 5 New Reverse Mortgage Rules http://www.interest.com/home-equity/slide-show/know/
Tighter Rules on Reverse Mortgages http://www.kiplinger.com/article/retirement/T040-C000-S004-tighter-rules-on-reverse-mortgages.html