Help for Seniors Who Have Reverse Mortgages
There's a lot to digest in the Housing and Economic Recovery Act of 2008.
I've addressed a few provisions of the new law already, and over the next several weeks I'll continue to comment on various sections of the act.
This time I want to point out a provision intended to help seniors by reining in fees and fraud associated with reverse mortgages.
Reverse mortgages were largely created for seniors who are cash-poor and house-rich -- meaning they have a lot of equity in their homes but little or no savings.
This type of loan allows people who are 62 or older to borrow against their equity. But unlike traditional home loan products, no payment is due on a reverse mortgage until the homeowner moves, sells or dies. If the home is sold, any equity that remains after the loan is repaid is distributed to the borrower or the borrower's estate. The repayment amount can't exceed the value of the home.
To qualify for this loan, you have to own your home outright or have a low enough mortgage balance that can be paid off at the closing with proceeds from the loan. Borrowers, who retain title to the home, can take the loan as a line of credit, a lump-sum payment, fixed monthly payments or a combination. The loan size depends on the borrower's age and other factors.
Under the new law, the amount a senior can borrow through a reverse mortgage has been increased to $417,000 nationally. However, that limit could be pushed to $625,000 if the borrower lives in a high housing-cost area. Currently, the amount a senior can borrow varies by county. The range now is $200,160 to $362,790.
Most important, the law reduces fees on this type of loan. It cuts the origination fee to 2 percent of the first $200,000 borrowed and 1 percent for any amount after that. The maximum origination fee can't exceed $6,000. The fee is currently capped at 2 percent of the loan limit or of the home's value. The law does allow for the cap to adjust, based on the annual percentage increase in the consumer price index.
Except for title, hazard, flood or other such insurance products, lenders are prohibited from requiring borrowers to purchase insurance, annuities or other similar products as a condition for a reverse mortgage. The law also restricts lenders who are originating reverse mortgages from working with, employing or providing incentives to other professionals trying to sell seniors other financial products as part of the application process.
The housing act includes a provision for reverse mortgages partly because of concerns that seniors were inappropriately -- and sometimes fraudulently -- being sold other financial products.
In some cases, seniors have been encouraged to use the proceeds from their reverse mortgage to buy annuities or long-term care insurance. The Financial Industry Regulatory Authority (FINRA), which regulates the securities industry, has issued several warnings about reverse mortgages, particularly cautioning seniors about doing business with financial professionals who want them to obtain a reverse mortgage in order to fund a particular investment product.
"Reverse mortgages may benefit some senior investors by unlocking their home equity, but they should only be entered into carefully and with a complete understanding of the consequences," Mary L. Schapiro, chief executive of FINRA, told a group of female investors during a speech in June.