Some of the new federal rules governing reverse mortgages are ‘positive’ says published author and expert.
The growing number of baby boomers retiring on a daily basis and the realization that they don’t have enough money from 401(k)s or IRAs to take care of themselves in their old age will make reverse mortgages “increasingly important” in the future for those who want to stay in their homes, according to the author of a study on the issue.
Alicia Munnell, the director of the Center for Retirement Research at Boston College, says that with people living longer and facing higher healthcare costs, tapping home equity is an option many older Americans will take. Companies aren’t providing pensions as they did in the past and many employees either aren’t participating or have modest balances in their 401(k) plans offered by their companies.
When the program launched in 1989, there were fewer than 10,000, but it grew to more than 110,000 in 2008 and 2009 as retirees turned to their homes as a source of economy during the recession, she says. The numbers dropped during the continuing housing bust before bouncing back to about 60,000 in 2013 and that number will continue to grow, she says.
The financial crisis prompted the government to redesign the government-insured reverse mortgage program, and people need to be aware of the new rules that should make the loans even more attractive, Munnell says. That rules deal with borrowing limits and eligibility.
Under a reverse mortgage, the borrower, who must be at least 62, can tap into their home equity. The loan isn’t repaid until the borrower moves or dies. Many people are turning to the option not only to pay bills and other expenses, but also to boost their retirement income. Some are even using the money to start a business.
“This is the key advantage for retirees who need more income: So long as they live in the house, a reverse mortgage does not add a claim on the income they already have,” says Munnell, a member of the board of directors of Longbridge LLC, a startup company that provides reverse mortgages.
What happened that prompted changes in rules is that declining home prices prevented lenders from recouping the full amount of their loan whenever houses were sold, Munnell says. That resulted in the government making up the difference.
Munnell says the most widely used reverse mortgage is the Home Equity Conversion Mortgages or HECM for homes with assessed values up to $625,500. In that scenario, the government provides insurance to the borrower in case the lender isn’t able to make the regular payments and provides insurance to the lender in case the loan balance exceeds the property value when sold, she says.
Homeowners have the option of taking a monthly payment, lump sum or line of credit, which in the last option rises over time by the interest rate on the line, Munnell says.
How much the homeowners get is based on the home value, the interest rate and age of the borrower. The lower the interest rate means the slower the outstanding balance increases and the older the borrower, there’s less time for the interest to accrue, she says.
Between 2010 and 2012, fixed-rate HECM mortgages accounted for 70 percent of loans, Munnell says. They become popular because it allowed the borrowers to take out the maximum available, she says.
“The major reason recent borrowers gave for taking out a HECM loan was to pay off an existing mortgage, rather than to increase income for everyday expenses, enhance quality of life or plan ahead for emergencies,” Munnell says. “This shift in motive reflects the impact of the Great Recession, which sharply cut the incomes of a large number of eligible homeowners, especially homeowners in their early 60s who lost jobs or had their hours or wages reduced.”
During that time, nearly ten percent of HECM borrowers were in default in 2012 because they failed to pay property taxes or homeowners’ insurance premiums, Munnell says. Since government insurance covered the losses, it has since moved to change the program to make it more financially viable and ensure older Americans are able to tap home equity for their retirement.
Here are the new rules, according to Munnell:
The program has a maximum loan amount based on the borrower’s age and current interest rates.
- The program limits homeowners from borrowing more than 60 percent of the maximum loan amount at closing or in the first year of closing. Borrowers are allowed to take out more to cover paying off and existing mortgage or making repairs as required by the lender.
- Borrowers are required to assess a prospective borrower’s ability to pay property taxes and homeowner’s insurance premiums. It’s based on credit reports and estimates of the homeowner’s residual income after paying expenses. That income is based on where people live and it should equal or exceed $886 to $998 a month for couples and $540 to $589 for individuals but people can still receive a reverse mortgage if they don’t reach these benchmarks.
“All these changes should be viewed as positive,” Munnell says. “The lower maximum loan amounts and the limit on first-year withdrawals will take pressure off the insurance fund by reducing the likelihood of default. The financial assessment will ensure that people taking out a reverse mortgage will not lose their homes by failing to pay taxes and insurance. A better customer experience combined with lower fees will also make reverse mortgages a more attractive option for retirees.”