Seniors with fixed-rate mortgages (FRMs) will be limited to the option of taking out a “saver” reverse mortgage, which allows homeowners to withdraw 10-15% less from their home than the “standard” program allows. For example, under the “standard” program, a homeowner with a home worth $200,000 was able to draw out about $130,000. In the “saver” program, the same homeowner can draw out roughly $109,000.
This is part of an effort to cut the FHA’s losses and avoid a bailout. The FHA-supported HECM program caused the FHA a loss of $2.8 billion in 2011. This loss was partly due to foreclosures completed on homes encumbered by FHA-insured reverse mortgages, which, at the time of foreclosure, had substantially less equity than what was originally covered by the HECM program.
The FHA is also considering more rules to govern which reverse mortgages they will insure.
first tuesday insight
Regulation over reverse mortgages — long-needed to protect the hard-won household wealth of our seasoned citizens — is finally on the way. It has been years of regressive government to lender delight, as ever more people retire and predatory lending becomes more rampant among seniors.
Fortunately, reverse mortgages are already receiving more regulation. The Consumer Financial Protection Bureau (CFPB) will soon be issuing new rules on reverse mortgages. And in California, a new law requires reverse mortgage counseling to be in person. In-person counseling is essential to explore the many factors which go into deciding whether or not your client ought to take out a reverse mortgage.
Other reasons why reverse mortgages are to be avoided?
Reverse mortgages keep large homes off the market that ought to be sold as a matter of the proper allocation of our national wealth. Retired individuals have little use for the size or location of the home they now live in, with exceptions. They need to relocate, mostly, and a reverse mortgage imprisons them in generally oversized and underused housing until total disability or death.
Worse, reverse mortgages are a lot like adjustable rate mortgages (ARMs): complex financial instruments intended for sophisticated individuals, used to prey on the financially uninformed. Lenders do not understand people; their primary concern is money.
Being able to borrow is not the proper yardstick for anyone who is retired. Besides, the FHA is for first-time buyers. For the retired: sell, downsize to a senior-friendly location very close to daily needs and bank the cash difference in prices.
Unemployment contributes to this improper borrowing. Lots of new jobs will help end the need for income from a mortgage. Arguably, income from a reverse mortgage for a few years until social security or other income is available might be a prudent financial plan. Then seniors can sell and relocate, shedding the mortgage in the process. A crisis calls for some flexibility, if you are to prevail.
Alternatives to a reverse mortgage include:
- selling the home and down scaling to a smaller residence or condominium; or
- refinancing if mortgage payments are an issue.
Re: The Nation’s Housing: FHA tightens up on reverse mortgages from The Washington Post