For homeowners who were looking to the federal government’s reverse mortgage program to supply lots of cash for their retirement years, here’s a heads-up: The pipeline just got narrower.
Pressed by Congress to slash losses, the Federal Housing Administration last week outlined a series of steps designed to limit the maximum amounts that seniors can draw down on their homes and to make qualifying for a reverse mortgage tougher.
Starting in January, applicants for FHA-backed reverse mortgages will for the first time have to qualify under comprehensive new “financial assessments” — covering credit history, household cash flow and debt levels — to make sure they have the “capacity and willingness” to meet their financial obligations under the terms of the loan. At the same time, they may also be required to set aside sizable portions of their drawdowns to handle property taxes and hazard insurance for years to come. As early as next month, some applicants will also be required to pay substantially higher FHA insurance premiums if they pull out hefty amounts of funds upfront at closing.
Reverse mortgages, limited to homeowners 62 and older, allow them to use the equity in their properties to provide funds for their retirement years. Borrowers need not repay their principal balances — plus compounded interest charges — until they move from the home, sell it or die.
FHA’s insured reverse mortgage program, which is hawked aggressively for private lenders by TV pitchmen including former Tennessee Sen. Fred Thompson, Henry “the Fonz” Winkler and Robert Wagner, dominates the field. But losses to FHA’s insurance funds caused by reverse mortgages have mounted in recent years and could trigger a nearly $1 billion bailout by the Treasury. FHA hopes to avoid that, however. The newly imposed eligibility and drawdown rules are intended to cut losses and help achieve greater financial stability for the program, according to Carol J. Galante, FHA’s commissioner.
Limits on the amounts that seniors can draw down, higher mortgage insurance fees and rigorous financial vetting of applicants are worrying some lenders and brokers active in the program. They estimate that the maximum drawdowns seniors can obtain will be reduced by about 15 percent, compared with the popular “standard” version of the program that has now been phased out.
Borrowers who take more than 60 percent of the maximum amounts available to them upfront will also pay substantially higher insurance premiums. The changes are likely to reduce the attractiveness of reverse mortgages to large numbers of seniors, according to some industry specialists. Matt Neumeyer, owner of Premier Reverse Mortgage in Atlanta, estimates that as many as 40 percent of previously eligible borrowers will look at the reduced limits, the new financial assessments and higher fees and say: No, thanks.
“You’re offering me less on my house for a whole lot more hassle”: That’s how clients will see it, Neumeyer said in an interview. “A lot of people are going to balk.”
He offered this example of how the reductions would work. For a 70-year-old owner with a $200,000 house, the standard version of the program would have offered a total “principal limit” — the amount available to the borrower — of $132,600. Under the revised program, that will be cut by nearly $20,000 to $112,800, provided the applicant can make it through the financial assessment hoops.
And if the borrower wants to pull down more than 60 percent of what’s available, he or she will get hit by higher mortgage insurance premiums. Add in the set-asides for future property taxes and hazard insurance that may be subtracted from the initial drawdown of funds, Neumeyer said, and many borrowers will look at either selling their home or obtaining a home equity line.
Deborah Nance, a reverse mortgage specialist with iReverse Home Loans in the Los Angeles-Riverside, Calif., market area, agrees that fewer seniors will qualify and that those who don’t will be predominantly borrowers with lower incomes, higher household debt loads and more marginal credit histories — “the needy people” who previously would have taken the maximum lump-sum drawdown to pay off mortgages and other obligations but now will be prevented.
Nonetheless, she said in an interview, “we’ll still be able to help a lot of people.”
Cristina Martin Firvida, director of financial security and consumer affairs for AARP, the seniors lobby, said that while she understands that FHA must cut losses, inevitably “the changes . . . will bar access to reverse mortgages for many.”
Ken Harney’s e-mail address is email@example.com.