The New World of Reverse Mortgages

by Peter G. Miller
August 11th, 2010

It was last October when HUD changed its reverse mortgage rules. Now we can see the results and it’s mission accomplished. Whether that’s a good thing or not is a matter worth discussing.

In essence, HUD reduced the principal limits for its home equity conversion mortgage program. Borrowers still had access to HECM financing, but not so much.

The reason for the change was that HUD was losing big money on the program. Congress, in its wisdom, determined that the best way to fix the HECM effort was to change the program’s terms. As HUD explained, the purpose of the lower principal limits was “to assist with the viability of the program. The new principal limit factors must be used for all HECMs for which the FHA case number is assigned on or after October 1, 2009.”

Okay, so a lot of time has passed since October 1st, the start of the government’s fiscal year. What’s happened?

Well, certainly, if principal balances are reduced then HUD has less exposure to losses if there’s a lender claim. That’s good for HUD and also good for borrowers in the sense that at least there’s a viable reverse mortgage program out there.

But there are also drawbacks, such as less cash for borrowers.

The Numbers

The result of the rule change has been dramatic. You might expect that given the weak economy that many seniors would want to embrace the reverse mortgage concept, especially the tested and well-known FHA approach. In fact that hasn’t happened.

So far in fiscal 2010 — the government period that began October 1st — we have had 64,846 HECM applications. That’s down 46.6% from the same period a year ago.

As to loan approvals, 60,604 HECMs have been endorsed so far this fiscal year by HUD — that’s off 30 percent from the prior year when we had 86,541 by the same point in the year.

The New Realities

It’s difficult to say that the new principal limits alone are behind the smaller number of reverse mortgages. There are other factors to consider as well: For instance, home values remain far below the levels seen three years ago when the real estate collapse began. Less equity means less ability to borrow.

Regardless of the general figures, the central issue is that property owners should always work to advance their self-interests. For some that will mean a reverse mortgage is an appropriate financial tool, for others that will not be the case.

If the benefits of reverse mortgages seem appealing — no monthly payments for principal and interest, no income tests, no need to move in most cases — then it’s a financial product to consider. Get information from HUD-approved counselors, but also get advice from attorneys who specialize in elder law. Don’t use a reverse mortgage to buy an annuity and make sure you understand both the benefits and the obligations. If that means you have to speak to a lot of people and ask a lot of questions, that’s fine.

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One Response to “The New World of Reverse Mortgages”

  1. Hattie Says:

    You are right in that qualified seniors now get less money (a lower percentage of a lower value). And for those seniors who really needed the fund to “get out from under” their old mortgage, the new formula gives then fewer, if any options.

    But I think another reason for the decline is the increased amount of negative “aura” generated by the regulatory environment. Because reverse mortgages are such an unusual product, it has always fallen victim to misinformation. Consumer education is still the key to the long term development of this unique mortgage product.