Regulators are putting new restrictions in place for reverse mortgages to make sure homeowners who want to cash out equity in a property can still pay the basic escrow costs of ownership: insurance and property taxes.
Breaking news from venues like SFGate shows how the Federal Housing Administration is changing the rules for FHA reverse mortgages, meaning fewer homeowners will qualify. In the past, reverse mortgages were largely untethered from credit reporting requirements on the fundamental assumption that the property owner could handle the new lending agreement, based on his or her previous purchase and maintenance of a property. Now, lenders will need to show the FHA certain credit information that supports the idea that a reverse mortgage holder will be able to satisfy local tax authorities and keep applicable home insurance.
The use of reverse mortgages
The prevailing use of a reverse mortgage is assistance for an elderly homeowner or aging family, for whom the costs of a traditional mortgage have become untenable. Typically, the idea is that a worker will retire, become disabled, or otherwise change income status, and the income will no longer be there to make the regular mortgage payments. The borrower can then take a reverse mortgage, which will lower payments and allow him or her to remain in the home. Seniors can also downgrade to a smaller and less expensive property using the equity from the previous home to maintain a new loan.
So, how much do reverse mortgages slant toward an aging borrower community? Resources from the U.S. Department of Housing and Urban Development, including detailed monthly reports of "Home Equity Conversion Mortgage" origination show the average age of the borrower as consistently over 70, revealing that, unlike some other types of lending, the FHA reverse mortgage program is aimed at a specific target audience.
Are reverse mortgages good?
With the new rules, fewer seniors will be able to qualify for a reverse mortgage. Is this a good thing?
The answer is complex. In the majority of cases, some key factors make a lot of difference in how reverse mortgages work for borrowers.
For instance, if an elderly home-owning couple has no children, it often makes sense to take equity out of a property and to live on that money. But if there are any beneficiaries, families may be aghast at how even modest changes to a loan structure take a big chunk of equity out of a home.
The bottom line is that, as with other kinds of similar lending, reverse mortgage fundamentals need to be fully explained to seniors or others who qualify. The lending environment needs to be supportive of the borrower, and the potential outcomes need to be communicated thoroughly. This isn't always the case, and as a result some public officials or advocacy groups will look at reverse mortgages almost like they would look at some of the more extreme examples of collateral loans, such as auto title loans and payday loans, which are under heavy fire from regulators.
In short, it's the terms of the reverse mortgage and the lending context that determine whether or not this is a good move for a borrower. A kinder, gentler lending environment recognizes that without adequate disclosure, lending can always be dangerous for a borrower. The new rules help to buttress this argument by creating common-sense standards to make sure fewer of those borrowers who successfully take a reverse mortgage will default or encounter dire financial emergencies later on.
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Justin Stoltzfus is a contributor to WiserAdvisor.