Horror stories about reverse mortgages have long led some consumer advocates and financial planners to consider them too risky, a loan of last resort. In addition to problems when a surviving spouse isn’t on the loan, these compounding-interest loans can be expensive. And seniors who can’t handle taxes, insurance, and home upkeep risk defaulting on the loan and losing their house.
But over the past three years, new government regulations aimed at protecting older borrowers and shoring up the government-backed loan program have gone into effect, according to Consumer Reports.
To be sure, the loans remain a poor choice for some, and Consumer Reports believes more reforms are needed. But some experts say that for certain homeowners, with the new regulations in place, it might make sense to consider a reverse mortgage.
With a reverse mortgage, borrowers who are 62 years or older can tap the equity they have built up in their homes without having to make monthly payments. But the interest builds up, and the loan must be repaid until the borrower dies, sells, or moves out.
Tougher new rules. It’s not just homeowners who can get into trouble with reverse mortgages, formally known as Home Equity Conversion Mortgages or HECMs. The Department of Housing and Urban Development insures HECMs and is on the hook if a foreclosed home sells for less than the loan’s value. It must reimburse the lender for the difference. The rules it rolled out starting in 2013 and continuing through last year were instituted not just to weed out selling to borrowers unsuited to the loans but also to reduce its own risk insuring them. The new rules include:
Tighter borrowing limits. Starting in 2014, most borrowers can take only 60 percent of the loan in the first year. Some might be eligible to take out more but must pay higher upfront costs.
Stricter financial requirements. In the past almost anyone with sizeable home equity could qualify for a reverse mortgage. Since April 2015, lenders are required to assess the borrower’s income, cash flow, and credit history to make sure they have enough to pay the future costs of owning the home. If they don’t, they might still qualify if they can put aside money from the loan to cover future taxes, insurance, and maintenance costs. If not, they won’t get the loan.
Stronger spousal protections. If a spouse isn’t listed as a borrower and the borrowing spouse dies or moves out (say, to a nursing home) for more than 12 months, the loan has to be repaid immediately or the surviving spouse faces foreclosure. Last June, HUD adopted a policy that allows a nonborrowing spouse to remain in the home as long as it is their primary residence and taxes and insurance are paid.
If those financial checks and loan limits had been in place sooner, a recent study by Moulton estimates, defaults would have been about 40 to 50 percent lower.
Still, some consumer protection experts say the reforms haven’t gone far enough and that loan servicers are dragging their feet helping surviving spouses take advantage of the new rules that allow them to remain in their home. A recent National Consumer Law Center survey of elder advocates found that their clients were experiencing that.
“We welcome these reforms — they give consumers more options,” Odette Williamson of the NCLC said. “But there is more work to be done on behalf of consumers to make sure that the options are truly available to them without jumping through a lot of hoops.” Norma Garcia, a senior attorney for Consumer Reports, adds that aggressive marketing, loan complexity, and borrower confusion also remain troubling concerns.