How Reverse Mortgage Rules Will Impact Retirees

As the federal government continues making changes to the reverse mortgage program, the debate continues on whether or not the program will help or hurt borrowers. Some say that the program's revisions could lower the cost for some buyers and make the program more attractive in the long run.

In the US, the Department of Housing and Urban Development (HUD) oversees a reverse mortgage program called the Home Equity Conversion Mortgage (HECM). This program, which is administered by the Federal Housing Administration (FHA), provides reverse mortgages to seniors who have equity in their homes and who want to increase their retirement income. In the past, reverse mortgages have not been particularly good sources of income for seniors, but that might no longer be the case with proposed upcoming changes.

In 2016, an actuarial report highlighted the cost to the FHA of maintaining the program. The findings, Forbes reports, inspired several "major changes" to make the program more sustainable in the long run. HUD's secretary, Ben Carson, adds that the goal is to make responsible changes that keep the program in operation while continuing to benefit taxpayers. This announcement brings relief to seniors who rely on revenue from reverse mortgages to continue living independently after they stop working.

The changes to the program will impact participants in various ways. The first change to the HECM program involves adjusting insurance premiums. In comparison to the current program, mortgage insurance premiums for HECM will increase for some borrowers, but they will be lowered for others. Additionally, ongoing mortgage insurance premium rates will decrease, which will reduce the total compounding rate price for the majority of borrowers. This change will align rates more with traditional mortgages and those of home equity credit lines. Furthermore, program changes will adjust principal limit factors, which in turn will influence the amount of home equity that homeowners and retirees can get, depending on their age, through the HECM program.

Traditionally, borrowers would be charged a Mortgage Insurance Premium (MIP) rate based on the amount taken out of their home equity. Previously, for a borrower who took out 60 percent or less of loan proceeds up front, the initial MIP rate was 0.5 percent of the total claim amount, which is defined as the appraised home value at the time of the loan. For borrowers who took less than 60 percent of their loan proceeds up front, however, rates were closer to 2.5 percent. The HECM program initially discouraged borrowers to remove large sums of money at once, but that incentive will be lifted with the new program changes. Now, borrowers will have a flat fee of two percent across the board, independent of the amount they borrow. In contrast to the previous program policies, the initial MIP rate will be higher for individuals who do not take a large portion of their loan proceeds up front. However, initial costs will actually decline for those who take more than 60 percent of those proceeds up front. Experts say that changes to upfront mortgage insurance premium rates will have some market impact. There may be a slight increase in the amount that people withdraw initially, but overall analysts don't expect consumer behavior to change dramatically. The reason, they say, is because the reverse mortgage industry and advisors have steered away from large upfront distributions in past years. Analysts do caution, however, that in the past borrowers have been able to establish a line of credit through the HECM program in the event that they need to tap into those savings in the future. Some lenders have offered that service or little or no cost. With the new changes, however, borrowers are expected to face higher upfront costs to establish an emergency HECM line of credit.

The second change involves lower continuing borrower costs. Ongoing MIP rates are projected to change, especially when combined with an increased upfront charge to MIP rates. In the past, the annual MIP rate was about 1.25 percent of a loan balance. This amount is now changing to 0.5 percent of a person's outstanding loan balance, which could translate to substantial savings of thousands each year. If a borrower has a loan balance of $300,000, for instance, he or she may save up to $1,000 annually with the revamped HECM program. By lowering the ongoing rate, borrowers with outstanding loan balances may see reduced MIP charges over the course of their loan's lifetime. For borrower with an emergency line of credit, however, lower ongoing rates will not really help until borrowers make a withdrawal from the HECM program. Experts predict that reduced costs for ongoing borrowers will make the program more attractive. They predict that consumers will shift towards lower ongoing costs, since program participants usually borrow upfront instead of just setting up a line of credit. A change to the annual MIP rate will also influence the loan's growth rate and the rate at which the line of credit grows. A lower MIP rate will translate to a slower growth rate for a line of credit, which analysts say is a positive change to the program. They add that reasonable growth rate limits for a line of credit are essential to keep the HECM program from insuring unreasonable amounts moving forward.

The final major change is lowering principal limit factors. This change has two parts. First, interest rates will be lowered from five percent to three percent. Next, there will be an overall reduction in principal limit factors. This benefits retirees and older borrowers, whose typical reverse mortgages generate a higher principal limit. In general, this raises the limit on the amount they can borrow in comparison to a younger borrower. Ultimately, this may bring down the program cost for participants. But with the new changes, borrowers also face more restrictions on borrowing from home equity with the new changes than they did in the past. This is due to the fact that principal limit factor tables will fall as a result. Analysts say that a drop in interest rates will increase competition in the reverse mortgage market. They believe that the change will incentivize lenders to lower their lender margins to produce maximum principal limits for borrowers. This will ultimately reduce the cost for the borrower. Lower rates and principal limit factors are also expected to slow credit line growth and debt amounts. This change, analysts say, will benefit people who are making larger upfront withdrawals. However, it will provide less of a benefit for people who are using a line of credit. Ultimately, this should minimize the number of mortgages that the FHA acquires over time, which in turn will reduce the FHA's program operation costs.

The upcoming changes will have mixed results for borrowers. However, the goal of the HECM program remains the same, as it will continue to be a resource for seniors and retirees to access their home equity. For older individuals, there are significant benefits to joining the program and having a reverse mortgage. For starters, a properly managed reverse mortgage can provide enough income for a few years. According to Time.com, people who are retired should consider establishing a line of credit soon after retirement, even if they don't expect to ever use it. A major advantage of reverse mortgages is that they do not have to be repaid as long as retirees continue living in their own homes. To qualify, participants must be at least 62 years old and own their own home. Loans can be extracted in several ways: as a lump sum amount, as staggered payments over a period of time, or as a line of credit that does not need to be repaid until the borrower moves out of the house or dies. In 2013, a new set of federal rules went into effect to regulate mortgages. Now, industry competition is also helping to lower loan fees.

However, there are some considerations to keep in mind before getting a reverse mortgage. Most mortgages today are distributed by private lenders through HUD. Because they are federally regulated, they have tighter restrictions now than in the past. This ultimately protects program participants from future default and foreclosure issues seen in the recession. With the new program changes, a significant benefit for many is that spouses who are not named on the loan will be able to remain in the designated home, provided it is still his or her primary residence. Before, non-borrowing spouses faced eviction when the borrower died or left the home. To take advantage of this benefit, borrowers are required to meet updated financial assessment requirements. This test ensures that they can continue to afford property taxes and other costs associated with home ownership. Another advantage of a reverse mortgage is that it provides flexibility be allowing people to switch to different payout schedules based on their needs.

Although the program will bring some positive changes for retirees, it is still a good idea to be a savvy shopper. Before settling for a loan, you should call around to get quotes for loan rates. Ideally, a lender should charge a small amount in total upfront costs. When you call, let the lender know if you plan to pay out-of-pocket for fees, or if you want them to be added to the loan balance.

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