While T.V. commercials with celebrities pitching “reverse mortgages” seem to be popping up more frequently, there are tighter restrictions looming for seniors looking to mine their home equity for more cash.
Starting in January 2014, the Federal Housing Administration will start limiting the maximum amounts that seniors can draw down on their homes as part of tougher qualifications for reverse mortgages, official known as the Home Equity Conversion Mortgage (HECM) Program.
The FHA backs reverse mortgages and the agency is trying to mitigate risk to its Mutual Mortgage Insurance fund.
Losses to the FHA’s insurance fund in recent years have been caused by borrowers maxing out available drawdowns with their reverse mortgages. As a result, the depletion to the agency’s insurance fund could spur a nearly $1-billion bailout by the U.S. Treasury. The FHA intends to avoid that with the expanded HECM restrictions.
The FHA’s reverse mortgage portfolio has seen major shifts in demographics and borrower preferences that added significant risks to the MMI fund.
These changes include borrowers opting for fixed rate mortgages where the borrower draws down all available funds at the time of closing. Younger borrowers with more indebtedness and stagnant home prices have also contributed to the added risk.
More borrowers ages 62 to 69 are looking for ways to tap home equity as a solution to urgent financial shortfalls, according to a report produced by MetLife’s Mature Market Institute, with the nonprofit National Council on Aging.
In response to concerns over the FHA insurance fund, Congress passed the Reverse Mortgage Stabilization Act of 2013 authorizing the U.S. Housing Secretary to establish any additional or alternative requirements to improve the soundness of the reverse mortgage program.
Reverse mortgages are restricted to homeowners 62 and older. The program allows them to use the equity in their properties for additional cash in their retirement years. Borrowers do not need to repay their principal balances and interest charges until they move from the home, sell it or die.
The reverse mortgage changes include limits on the amounts that seniors can draw down, higher mortgage insurance fees and more thorough financial vetting of applicants.
Brokers active in reverse mortgages estimate that the maximum drawdowns seniors can obtain will be reduced about 15 percent, compared to the previous standard in the program.
Borrowers who take more than 60 percent of the maximum amounts available upfront will also pay significantly higher insurance premiums.
The FHA is providing approved lenders with a “HECM Financial Assessment and Property Charge Guide” to help loan underwriters to implement reforms announced this month. They include:
- Changes to initial mortgage insurance premiums and principal limit factors;
- Restrictions on the amount of funds senior borrowers may draw down at closing and during the first twelve months following closing;
- Requiring a financial assessment for all HECM borrowers to ensure that they have the capacity and willingness to meet their financial obligations and the terms of the reverse mortgage; and
- Requiring borrowers to set aside a portion of the loan proceeds at closing (or withhold a portion of monthly loan disbursements) for the payment of property taxes and insurance based on the results of the Financial Assessment.