By Michelle Singletary
Sunday, August 10, 2008
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.
The U.S. Department of Housing and Urban Development created one of the first reverse mortgage products, the federally insured Home Equity Conversion Mortgage.
Although only 1 percent of older households currently have a reverse mortgage, the market for this product has grown sharply in recent years -- increasing from 6,600 loans in 2000 to 107,000 loans in 2007, according to research by AARP's Public Policy Institute.
Still, the high fees scare off many borrowers.
The fees and costs associated with reverse mortgages are often significantly higher than traditional home-loan products -- sometimes as high as 4 to 8 percent of the total loan amount, according to FINRA.
The housing act requires the government to conduct a study to look into the costs associated with reverse mortgages.
For more information about reverse mortgages, try these Web sites:
· AARP's http://www.aarp.org/money/revmort.
· HUD's site at http://www.hud.gov/buying/rvrsmort.cfm.
· The National Reverse Mortgage Lenders Association's reverse mortgage calculator at http://www.reversemortgage.org. The calculator will give you an estimate of the fees you may be charged. Be sure to click on the link for "loan summary" after your calculation.
Many seniors who consider a reverse mortgage do so to cover necessities such as health care, according to AARP. Forty-seven percent of respondents in an AARP survey said they needed the loans to supplement their incomes.
Because so many seniors see no other option than to tap their home's equity to pay for everyday expenses, I'm glad to see the new housing law provides some protections for these homeowners.
· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and athttp://www.npr.org.
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