By Alicia H. Munnell
As a great fan of reverse mortgages, I am delighted that
the government has made the changes needed to protect the viability of the Home
Equity Conversion Mortgage (HECM) program.
Accessing home equity will become increasingly important
in a world where retirement needs are increasing (as people live longer and face
rapidly rising health care costs) while the retirement system is contracting,
with Social Security replacement rates declining under current law and
employer-provided pensions shifting from defined benefit plans to 401(k)s where
balances are modest.
Reverse mortgages allow homeowners age 62 and older to
borrow against the equity in their house and pay off the loan plus accumulated
interest when they die, move out, or sell the house. The most widely used
reverse mortgage is the HECM, which provides loans on assessed home values up to
the Federal Housing Administration current limit of $625,500. Under this
program, the government designs the product and provides insurance (for a fee)
for the borrower, against the risk that the lender can no longer make the
contracted payments; and for the lender, against the risk that the loan balance
exceeds the property value. The product is then sold through private-sector
lenders. (Full disclosure: I am an investor in and a member of the board of
advisors of Longbridge, LLC, a startup company that has been formed to provide
reverse mortgages in a socially responsible fashion.)
Before the changes, the government provided two HECMs –
the "standard" and the "saver." The saver was cheaper than the standard, but
provided less access to home equity than the standard and was rarely used.
Since the financial crisis, the
government fund that provides the insurance for the reverse mortgages has been
under pressure. Financially troubled borrowers were drawing much of their
money at closing, leaving them with few resources to sustain homeownership. The
advent of fixed-rate mortgages with high profit margins gave lenders an
additional incentive to encourage borrowers to take out all of the
reverse-mortgage proceeds up-front. And declining home prices hurt the
program's finances, since lenders could not recoup the full amount of the loan
when the houses were eventually sold.
The changes, most of which went into effect on Sept. 30,
are designed to fix these problems. The new regulations place a limit on the
amount that can be withdrawn in the first year. In most cases, borrowers cannot
access more than 60% of their total loan. Some exceptions are possible if an
existing mortgage and other "mandatory obligations" exceed the 60% limit.
Mandatory obligations do not include credit-card debt.
A portion of the mortgage costs will now be based on the
amount withdrawn. Borrowers who take out more than 60% in the first year will
have to pay a higher up-front mortgage insurance premium (2.5% of the appraised
value of the property) than those who withdraw less than 60% (0.5% of the
appraised value). Previously, the upfront fees were 2% for standard reverse
mortgages and 0.01% for savers.
The new regulations also reduce the maximum amount of
home equity that borrowers can access. It will still depend largely on the age
of the borrower, the value of the home, and the interest rate. But under the
new regulations, assuming an interest rate of 5%, a 72-year-old will be able to
withdraw up to 57.5%, minus fees. This compares to 67.7% of the home's value
using the standard and 55.4% using the saver.
Starting in January, lenders will also be required to
make sure that borrowers will be able to make their required tax and insurance
payments over the life of the loan, by examining all sources of income and
credit history. To qualify for a full loan, homeowners must have a certain
level of monthly income left over after paying all expenses, including taxes and
insurance. For a single homeowner, this threshold level ranges from $529 to
$589, depending on the region in which he lives. If the borrower falls short of
this amount, he will be required to make a cash set-aside, which will either be
deducted from payments or charged to a line of credit.
All these changes should be viewed as positive. The
limit on first-year withdrawals will reduce the likelihood that borrowers will
spend their money and be left without a buffer to allow for future needs. The
financial assessment will ensure that the people taking out a reverse mortgage
will not be forced into bankruptcy by failing to pay taxes and insurance.
Consolidating the standard and the saver will make the program easier to
understand. A better customer experience combined with slightly higher fees and
slightly lower loan amounts will also take pressure off the insurance fund.
We need this program to work well, because people are
going to need the money.
»
next
next
No comments:
Post a Comment