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Blog: Government deals a blow to reverse mortgages


It hasn’t been a good month for reverse-mortgage lenders.

In less than a week, the industry sustained two body blows from the U.S. government. First, watchdog agency the Consumer Financial Protection Bureau cautioned senior borrowers to be wary of using reverse mortgages to bridge the path to full retirement.

reversemortgageblogThe U.S. Department of Housing and Urban Development (HUD) then announced it was raising the insurance premium costs for future reverse mortgages and lowering the maximum amount that can be borrowed — moves that could reduce the number of reverse mortgages significantly over the next year. HUD oversees the Federal Housing Administration, which insures almost all of the nation's reverse mortgages.

The agency moves appear to be unrelated. CFPB and HUD's actions, in part, were taken to reduce the chance that a reverse mortgage will entirely wipe out a senior’s home equity stake at the end of their lives.

The CFPB took issue specifically with the industry’s marketing tactics. The reverse-mortgage industry, which is known for its national commercials with celebrity pitchmen, has been trying to rebrand itself as a superior home equity line of credit product, the better version of a traditional HELOC for people 62 and over. Reverse mortgages also are being sold as a way for seniors to delay taking social security. The idea is that a retiree can take out a reverse mortgage and live on its proceeds for a few years, then take social security at age 67 or 68 when the full benefits kick in.

The CFPB, however, warned seniors against doing this, contending that the average borrower will pay more in fees and interest on the reverse mortgage than they would gain in additional social security benefits. CFPB also warned seniors that a reverse mortgage — if it is not paid off within a few years and the borrower allows the principal to carry through to the age of 85 — will continue to accumulate insurance and interest charges that could wipe out the entire equity stake in their homes.

Let’s remember what a reverse mortgage is. The senior is borrowing against the equity that they have accumulated over the years. They can take a payment as a lump sum, as a line of credit or in monthly installments. The key point, however, is that the drawn amount doesn’t have to be repaid until the borrowers stop living in the house. The interest and fees do, however, keep accumulating year-after-year on the principal. So, the principal balance of the mortgage can grow over time and gobble up the home’s equity. 

HUD’s moves this past week to restructure the insurance fees and lower the lending limits for reverse mortgages were mainly intended to shore up the Federal Housing Administration's (FHA’s) insurance fund. Reverse mortgages have been a big net loser for the fund and a source of volatility.

Younger borrowers of traditional forward mortgages guaranteed by FHA are subsidizing lower insurance costs for the older borrowers of reverse mortgages, according to HUD officials. It means that HUD can't lower the premiums for regular FHA borrowers.

By restructuring the program, however, HUD also was trying to reduce the risk that seniors will lose all their home equity through a reverse mortgage. In the first place, the average borrower will be able to borrow less against the value of their home. HUD also restructured the insurance costs, so most borrowers will pay more as an upfront charge, but less in recurring annual expenses. HUD lowered the annual insurance premiums. That should slow the rate at which the annual premium costs add to the principal and erode the borrower’s equity.   


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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