COLUMN-Reverse mortgages get smaller and costlier


By Mark Miller

CHICAGO, Sept 10 (Reuters) - If you've been thinking aboutgetting a reverse mortgage, September offers a model-yearcloseout sale opportunity.

A new set of rules governing Home Equity ConversionMortgages (HECMs), the most popular type of reverse loan, hasjust been issued by the U.S. Department of Housing and UrbanDevelopment, following up on Congressional action last monthauthorizing reforms.

The upshot: Starting in October, HECM loan types will beconsolidated, loans will be smaller and fees will be higher.There will be new limits on how much you can draw down on a HECMduring the first year of your loan. And starting in January,some borrowers will be required to put a substantial part oftheir loan proceeds in escrow accounts to pay future propertytaxes and insurance costs.

The reforms are badly needed. The HECM program hasexperienced rising loan defaults, posing risk for the FederalHousing Administration insurance fund, which backstops theloans.

But for borrowers, the new rules mean navigating a changedHECM market.

Currently, homeowners age 62 or older can qualify if theyhave sufficient equity in their property. The amounts you canborrow are determined by a formula that takes into account thepercentage of the home's value based on the borrower's age andprevailing interest rates.

Although reverse loan borrowers don't have to pay back theirloans until they move out of their homes or die, defaults arepossible because the loan terms require them to continue payingproperty taxes, hazard insurance and any required maintenance ontheir homes.

The changes are aimed at making HECMs safer for seniors, andto discourage their use as a Hail Mary pass.

"It really presents a shift toward utilizing the HECM as along-term financial planning tool, rather than something forcrisis management," says Amy Ford, director of the NationalCouncil on Aging's reverse mortgage counseling services network.

Here's a look at the key changes.


HECMs come in two flavors - standard and "saver." StandardHECMs offer large loan amounts (up to $625,500) and carry higherfees; saver HECM loan amounts are 10 to 18 percent lower thanstandard loans, depending on the borrower's age. But fees aremuch lower.

Going forward, there will be only one type of HECM loan, andfees will vary depending on how much you borrow.

Next month, the mortgage insurance premium for larger loans(more than 60 percent of the available principal) rises to 2.5percent of your home's appraised value, up from two percent. Forloans below the 60 percent threshold, the fee is 0.005 percent,up from 0.001 on the old saver loans. The fees were increased toshore up reserves of the FHA Mutual Mortgage Insurance Fund,which is used to repay lenders in situations where they can'trecover the full amount at the loan's termination.


Limits on the size of larger loans will be reduced, startingnext month. The formulas governing loan amounts are complex, butthe cuts amount to roughly a 15 percent reduction, according toPeter Bell, president of the National Reverse Mortgage LendersAssociation.

In general, borrowers won't be able to access more than 60percent of the total loan in the first 12 months. This change isaimed at discouraging large drawdowns that can leave borrowersstrapped later on if proceeds are used up and other incomesources dry up.


Starting in January, borrowers will be required to undergo afinancial assessment to make sure they have the capacity to meettheir obligations and terms of the HECM. Lenders will berequired to assess your income sources, including income fromwork, Social Security, pensions and retirement accounts. Yourcredit history also will be considered.

Riskier borrowers can be denied, or required to make a "setaside" fund out of loan proceeds to pay future property taxes,hazard insurance and even flood insurance in areas identified asflood zones by the federal government. The amount of money setaside could reduce loan proceeds substantially, since it willbased on the borrower's life expectancy.

So, how about that model-year closeout sale? It's over onSept. 30. You'll be able to qualify for a loan under the oldterms if you apply, undergo required financial counseling(different from the new financial assessments) and have a loancase number by that date.

NCOA offers two online tools that can walk you through theoptions. The Home Equity Advisor helps you assess whether a HECMis a good fit for your current living situation. NCOA's BenefitsCheck-up can help you identify benefit programs that can helpsubsidize prescription drug, healthcare or food costs, or reduceyour property taxes.

Ford urges seniors in need of cash to think carefully aboutall their options before borrowing.

"Do you want to tap home equity at all? That's the firstquestion to ask," Ford says.

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