The rules for buying the most common reverse mortgages are changing to protect borrowers. That's a mixed blessing, though, and not everyone's covered.
Here’s good news for seniors considering a reverse mortgage: The federal government is about to eliminate a big danger lurking in the most popular reverse mortgage program.
As things stand now, federal rules allow mortgage companies to evict widows and widowers whose names don’t appear on reverse mortgages issued under the Home Equity Conversion Mortgage or HECM program.
MarketWatch describes the issue:
Reverse mortgages allow people age 62 or older to convert their home equity into cash, and almost 600,000 reverse mortgages are currently outstanding nationwide. But the balances on these mortgages become due with interest when the borrower dies. Consequently, a surviving spouse can face eviction if he or she is not listed on the mortgage.
The U.S. Department of Housing and Urban Development, which writes the rules for HECM reverse mortgages, says the rule change takes effect Aug. 4. HECMs, which are FHA insured, are one of three types of reverse mortgages on the market for seniors, but they have by far the largest share of the market.
The new provision in the HECM rules will affect every couple obtaining a reverse mortgage on or after Aug. 4. The provision requires that when a married couple buys a reverse mortgage, both spouses must be named on the mortgage. One of them can be what HUD calls a “non-borrowing spouse.” (Read the rule changes in HUD’s instructions to mortgage companies.)
Reverse mortgages will still be potentially risky and expensive, but the rule change will fix a serious problem.
Tapping your home for income as a last resort
Despite their potential problems, reverse mortgages can play an important financial role for seniors if other options have been exhausted.
Used correctly, reverse mortgages can be a valuable tool for seniors to stay in their homes and gain access to money needed for retirement. Seniors who have built up equity in their homes can borrow against a percentage of that and take out a lump sum or a line of credit. The loan doesn’t have to be repaid until the homeowner moves out or dies, but borrowers still have to pay property taxes, maintenance and insurance.
Reverse mortgage lenders and brokers note that the loans are highly regulated and require potential borrowers to speak to a certified housing counselor about the potential pitfalls before taking out the loans.
The 400-member National Reverse Mortgage Lenders Association, an industry trade group, closely monitors members’ advertising, the group’s executive told the Times.
But what about current borrowers?
While the HUD rule change protects new borrowers, the effect isn’t clear for those who already have reverse mortgages.
The new rule will give some protection from eviction to spouses not on an existing mortgage when their husband or wife dies. But the financial requirements for that protection are so steep that few borrowers are likely to qualify, Craig Briskin, a partner at Mehri & Skalet, a Washington, D.C., law firm specializing in class-action suits, told Money Talks News. Briskin’s firm and AARP Foundation Litigation are suing HUD in U.S. District Court in Washington over the eviction problem.
If you are married and you have a reverse mortgage on which only one of you is named, your options remain limited. You can:
- Ask your mortgage company if you would be eligible for protection under the new HUD rule.
- Pay off your reverse mortgage.
- Refinance your reverse mortgage, getting a new one with both of your names on the contract.
Paying off a reverse mortgage would be financially impossible for many seniors, however. And, as for refinancing, steep fees and high mortgage insurance charges add up quickly with reverse mortgages; borrowers may now owe too much to qualify for a refinance.
The back story
You may wonder why borrowers would keep their spouses’ names off their reverse mortgage contracts. But there is a logic behind it: The current HUD rules give both borrowers and reverse mortgage salespeople an incentive to name only the older spouse as a borrower.
As ConsumerFinance.gov says: “The older a borrower is, the more money he or she can borrow.”
The desire to get a bigger loan amount entices some older borrowers to exclude their spouse’s name so they’ll qualify for more money.
Salespeople have an incentive to sell — or even to push — larger loans because their commissions are based on the loan’s size. In some cases, aggressive salespeople have dropped second borrowers from loan documents at the last minute, downplaying the significance of the change to the borrowers, Briskin says.
Many widows and widowers today “are facing foreclosure because they were left off the reverse mortgage, often without even knowing it,” he says. “They didn’t realize they were signing away their rights.”
Help — at a price
For new reverse mortgage borrowers, protection will come at a cost. Since the size of a reverse mortgage is smaller for younger borrowers, adding a younger spouse to your mortgage is likely to reduce how much money you’re allowed to borrow, even when the younger spouse is not a borrower on the mortgage. The rules say, “Where a HECM mortgagor has identified a non-borrowing spouse, the mortgagee must base the principal limit on the age of the youngest mortgagor or non-borrowing spouse.”
Briskin says that, while he is pleased with the protection for new borrowers, he and the AARP foundation will continue pressing HUD in court for further rule changes that prevent evictions of widows and widowers whose spouses obtained reverse mortgages before Aug. 4.
What has your experience with a reverse mortgage been like? Write your thoughts in the comments below or at Money Talks News’ Facebook page.