New Housing Bill Makes Substantial Changes to
Reverse Mortgage Program
Larger loans, smaller fees and more protection for
seniors in bill signed by President - but many still urge caution
Aug.
11, 2008 – 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.
“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.
Aug.
11, 2008 – 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.