It’s a jarring situation: Your spouse dies, and you end up facing the possible loss of your home through foreclosure--just because you aren’t listed as a borrower on a reverse mortgage on your home.

       That’s what happened to Robert Bennett of Annapolis, Md., when his wife died in 2008. She was listed as the borrower on a reverse mortgage taken out on their home before her death -- but Mr. Bennett wasn’t. Rules administered by the U.S. Department of Housing and Urban Development allow banks to force surviving spouses who aren’t also listed as borrowers to pay off reverse mortgages, and to foreclose on the property if they can’t.

But a court ruling this week in a case brought against H.U.D. on behalf of Mr. Bennett by AARP Foundation Litigation should lead to regulatory changes that will help him and others like him remain in their homes, said Jean Constantine-Davis, a senior attorney with the foundation.

“The decision marks a turning point for surviving spouses such as our clients and ensures that they will receive the protections guaranteed by the law: that they will be able to remain in their homes, despite the loss of their husband or wife,” she said in a statement.

The United States District Court for the District of Columbia ruled Monday for the AARP, finding that H.U.D.'s rules contradict federal law governing reverse mortgages, which protects surviving spouses. The court sent the matter back to the housing agency for a fix.

It’s not known yet exactly how the agency will correct the problem, Ms. Jean Constantine-Davis said. H.U.D. may have to offer to take over affected loans, since the rules gave lenders the right to foreclose. It’s also unclear how many reverse mortgages are affected, or what their total value is, she said.

A spokesman for H.U.D. didn’t return a phone call seeking comment; a recorded message at the agency’s press office said the office was closed Tuesday afternoon because of the federal government shut down.

No one was available to comment Tuesday at the National Reverse Mortgage Association, which represents lenders.

The decision, Ms. Constantine-Davis said, should help remedy a potentially devastating snag in a financial product that was designed to help older people meet their expenses. “The decision will ultimately affect an untold but substantial number of similar surviving spouses, many of whom have contacted plaintiffs’ counsel over the past few years,” she said.

Reverse mortgages work differently than traditional mortgage loans. They’re only available to you if you’re 62 or older, and they’re meant to help you tap the equity in your house. Instead of you paying the bank, the bank pays you -- either in a lump sum, or in monthly distributions -- and interest accrues. When you die or move, you or your heirs typically sell the home to pay off the loan, and keep any money left over if the house is worth more than the remaining balance.

Here are some questions to consider, before taking out a reverse mortgage:

■ Does this ruling mean that I can now safely take out a reverse mortgage and leave my spouse off the loan?

That’s not a good idea, said Ms. Constantine-Davis. “I would at this point still be very discouraging from doing a reverse mortgage that leaves the spouse off,” she said, until it’s clear precisely what H.U.D. will do to fix the problem.

■ Why would I want to leave my spouse off the loan anyway?

Reverse mortgages are granted based on factors including the age of the borrower; the younger you are, the less money you get, since you are likely to stay in the home longer. Some borrowers may have been advised by brokers to leave the younger spouse off the mortgage to increase the amount of their loan, but borrowers may not have realized that could leave them at risk when the borrowing spouse died.

■ How can I be sure that I understand the risks of taking out a reverse mortgage?

Reverse mortgage borrowers are required to undergo independent counseling before signing loan papers; make sure both you and your spouse attend. New rules governing the loans start taking effect this month. For instance, you may be limited in the amount of money you can access in the first year of the loan. And your finances may get more scrutiny, to make sure you can continue to pay taxes and insurance on the home. More details are available in recent column by my colleague, Tara Siegel Bernard.   

Source: http://www.nytimes.com/2013/10/02/your-money/surviving-spouses-with-reverse-mortgages-win-case.html?_r=0


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A rule of the U.S. Department of Housing and Urban Development governing repayments of reverse mortgages by surviving spouses conflicts with federal law, a judge in Washington ruled.

HUD erred “when it insured the reverse mortgages of plaintiffs’ spouses pursuant to regulation, which permitted their loan obligations to come due upon their death regardless of whether their spouses were still alive,” U.S. District Judge Ellen Huvelle said in an opinion released today. The widowers who sued HUD cited a federal law that defers an obligation to pay off such loans until the homeowner’s death and defines “homeowner” to include the surviving spouse.

HUD rules make it more likely that a surviving spouse will end up in foreclosure, according to the suit, which was filed in 2011.

Brian Sullivan, a spokesman for HUD, didn’t immediately respond to telephone and e-mail requests for comment on Huvelle’s ruling.
Home’s Equity

Reverse-mortgage loans pay out a home’s equity to the homeowner, sometimes in installments, and are usually repaid when the borrower dies or moves out of the house. Borrowers are considered behind on payments if they don’t stay current on their property taxes and insurance.

The loans are available only to borrowers who are at least 62 and who have significant equity in their homes.

The language HUD used when implementing the law states that the loan comes due “if a mortgagor dies and the property is not the principal residence of at least one surviving mortgagor.”

In defending its wording of the regulation, HUD said that it was concerned that a homeowner, after taking out a reverse mortgage, might marry a young spouse, which would increase a lender’s risk, according to a filing in the suit.

The complaint initially was dismissed by Huvelle, who found that since the widowers weren’t borrowers on the loans, winning the lawsuit wouldn’t save their homes because it was the lender’s decision whether to foreclose.
HUD Remedies

In reinstating the case earlier this year, an appeals court said HUD could come up with remedies to keep widowers in their homes.

“HUD could accept assignment of the mortgage, pay off the balance of the loans to the lenders, and then decline to foreclose,” Circuit Judge Laurence Silberman wrote in the appeals court ruling.

Craig Briskin, a lawyer for the plaintiffs, said he didn’t know how many homeowners are affected by the ruling, “but the number of people who have contacted us is in the high hundreds, perhaps more than a thousand.”

“The court has told HUD, protect these people,” Briskin said. “They do have discretion to figure out how are we going to accomplish this.”

The case is Bennett v. Donovan, 11-cv-00498, U.S. District Court, District of Columbia (Washington). 

Source: http://www.bloomberg.com/news/2013-09-30/reverse-mortgage-rule-on-surviving-spouse-tossed-by-judge.html  
To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

more articles about reverse mortgages at Best James Clooney

Security One Lending (S1L) is making headway in educating financial planners on the use of reverse mortgages as a viable retirement tool.




S1L, a division of Reverse Mortgage Solutions, presented a national webinar last week specifically designed for Certified Financial Planners, which attracted more than 500 advisors.




The webinar, “A Fresh Look at Reverse Mortgages,” featured guest speaker Michael Kitces, a partner and the director of research for Pinnacle Advisory Group. Located in Columbia, Maryland, Pinnacle is a private wealth management firm that oversees approximately $1 billion of client assets.




Attending CFPs also received one hour of C.E. credit for the session, the second in an ongoing series of national webinars offered by S1L and the American C.E. Institute. In June, Dr. Barry Sacks presented the first webinar in the series, “Reversing Conventional Wisdom.”




“The success of these presentations clearly shows the reverse mortgage has evolved from merely a needs based ‘product of last resort’ to true and viable option to be considered as just one component in an overall and more comprehensive retirement plan,” said Torrey Larsen, president of retail lending for RMS.




Eliminating reverse mortgage misconceptions among the mainstream financial community is a key element in S1L’s “education business model,” said Director of Business Development Shelley Giordano, who has been working on S1L’s ongoing education efforts among the financial planning community. Those efforts have included the webinar series as well as the recent establishment of a reverse mortgage advisory board to target misconceptions about the product among financial planners.




“The success of these first two national webinars clearly shows this topic is incredibly timely and relevant to financial advisors working with seniors,” Giordano said.




Future presentation topics will address the relationship of long-term care and reverse mortgages, as well as the ongoing series “Using Household Wealth During the Distribution Phase of Retirement.”




Source: http://reversemortgagedaily.com/2013/09/23/s1l-continues-dialogue-with-financial-planners-on-reverse-mortgages/




Check out more articles at Jim Clooney WS

The spigot on reverse mortgages has been slowly tightened over the last several years. Borrowers can no longer tap as much of their home equity as they could before the housing crisis. 




 Now the rules are about to change again.




As a result, some people with heavy debt who were hoping a reverse mortgage would solve their financial problems may find that it is no longer a viable option. Under the new rules, which go into effect on Sept. 30, many borrowers will be able to get access to even less of the value locked in their home — about 15 percent less — compared to the maximum available now. The rules also put new limits on the amount of money that can be taken out in the first year, which may further deter the most distressed prospective borrowers.




“The changes really put the product on track as a long-term financial planning tool as opposed to a crisis management tool,” said Ramsey Alwin, senior director of economic security at the National Council on Aging.




The Federal Housing Administration, which insures most reverse mortgages, is making the changes in an effort to strengthen the program, which allows people 62 and older to tap their home equity without making payments. Lenders get their money back once the house is sold.




Since the economic crisis, more homeowners withdrew the entire pile of cash they were eligible for all at once, which strained the program’s reserve funds (lenders were also paid more when borrowers took large sums, and reverse mortgage experts say lenders prodded borrowers in this direction). Declining home values also hurt the program’s overall finances, since lenders often could not recoup the full loan amounts when the houses were ultimately sold.




The F.H.A. hopes that the changes, particularly the limits on how much can be withdrawn in the first year, will encourage people to tap their home equity slowly and steadily, in a way that will enable property owners to stay in their homes as they age. That’s a change that several consumer advocates, along with members of the industry, agree was necessary.




Up until now, just about anyone could qualify for a reverse mortgage. But perhaps the biggest change to the program will go into effect early next year, when borrowers will also need to prove that they have the wherewithal to pay property taxes and insurance over the life of the loan. If they cannot, they will have to set that money aside — and that could consume much of the loan’s proceeds.




There is still a little time to get a mortgage using the current program. As long as prospective borrowers go through the required financial counseling and receive a case number before Sept. 28, they will be able to qualify under the current rules.




Here’s a closer look at how the changes will affect prospective borrowers:




FIRST-YEAR LIMIT There will now be a limit on the amount of money that can be withdrawn in the first year. A homeowner eligible to withdraw a total of $200,000 in cash, for example, would be allowed to get only $120,000, or 60 percent of that sum, in the first year.




There are exceptions. Some homeowners will be able to draw a bit more if their existing mortgage, along with other items like delinquent federal debts, exceed the 60 percent limit. Homeowners are required to pay off those items — which regulators call “mandatory obligations” — before qualifying for the loan. So borrowers can withdraw enough to pay off these types of obligations, plus another 10 percent of the maximum allowable amount (in this case that’s an extra $20,000, or 10 percent, of $200,000).




Credit cards are not considered a mandatory obligation, so people with significant credit card debt may find they can’t withdraw enough money to pay those loans off, said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School, who is also a partner in a start-up company, Longbridge Financial, that provides reverse mortgages. “There will be fewer financially distressed borrowers for whom a reverse mortgage will provide a satisfactory solution,” he added. “The product will be more attractive for people using it as part of a retirement plan.”




Borrowers generally choose to receive the money in one of two ways: as a lump sum (using a fixed-rate loan) or through a line of credit (which carries a variable rate). But lenders typically require people who use a fixed-rate loan to withdraw all the money at once — so they’ll be limited to 60 percent (or the amount of their mandatory obligations plus 10 percent). Only borrowers who opt for the line of credit may be able to access more money over time.




LOAN AMOUNTS The two types of reverse mortgages available now — the “standard” and the “saver” — are essentially being eliminated and consolidated into one.




The maximum amount of cash you can withdraw still largely depends on the age of the youngest borrower, your home value and the prevailing interest rate. (The older you are, the higher your home’s value and the lower the interest rate, the more money you can withdraw.)




Starting on Sept. 30, however, many prospective borrowers will have access to about 15 percent less home equity, on average, than the maximum amount available now.




With a mortgage rate of 5 percent, that means a 62-year-old will be able to withdraw up to 52.6 percent of the home’s appraised value, minus fees, under the new rules, according to the F.H.A. Under the existing program, the same person can tap up to 61.9 percent of the home’s value using a standard reverse mortgage, and 52.3 percent using a saver mortgage (which is cheaper than the standard, but gives you access to less home equity).




PRICING Part of the mortgage’s cost will now be based on the amount withdrawn. If borrowers take out more than 60 percent of the total amount available in the first year, they will have to pay a higher upfront fee: the upfront mortgage insurance premium, which can be wrapped into the loan, will be 2.5 percent of the appraised value of the property. Everyone else — that is, people withdrawing less than 60 percent — will pay 0.5 percent of the value of the property. (Previously, the upfront fees were 2 percent for standard mortgages and 0.01 percent for savers.)




The second fee, known as the annual mortgage insurance premium, will remain at 1.25 percent of outstanding loan balance.




FINANCIAL ASSESSMENT Lenders will also be required to ensure that homeowners can afford to make all the necessary tax and insurance payments over the projected life of the loan. Starting Jan. 13, lenders will analyze all income sources, which includes any earnings as well as pension income, Social Security, individual retirement accounts and 401(k)’s, among other things. A borrower’s credit history will also be factored in.




Lenders will also look closely at how much money is left over after paying typical living expenses, which include all property-related costs, federal and state income taxes, utilities and other debts and obligations, like a car payment or alimony.




If a single homeowner has from $529 to $589 left over after paying those expenses (thresholds are higher for couples and families), they will probably be able to qualify for a reverse mortgage free and clear — that is, without having to set aside a big sum of money for property tax and insurance.




If a prospective borrower falls short, the lender is supposed to look at other factors. The guidelines say they can consider “extenuating circumstances,” but it is unclear how lenders will interpret them. F.H.A. officials said they would also factor in how the loan proceeds would help improve a consumer’s financial situation.




SET ASIDE If a lender determines that you may not be able to keep up with property taxes and the required flood and hazard insurance payments, you will be required to set aside money (depending on your situation, it may be charged to your credit line or deducted from your payments), which means less cash in your pocket.




This requirement could disqualify many borrowers. “In many cases, the reserve consumes the entire credit line and then some,” said Mark Browning, president of Community Home Equity Conversion Corporation, a reverse mortgage lender in Rochester. “This provision hits especially hard in geographies where home values are more modest and property taxes and/or insurance charges are higher as a proportion of the home value.”




The upside: Property taxes and insurance would be taken care of, leaving other income to pay for living and other expenses. How all of this will work in practice, of course, remains to be seen.




“What regulators are trying to do is shift behavior so that people are more thoughtful and methodical about how they draw the money,” said Peter H. Bell, president of the National Reverse Mortgage Lenders Association, the industry trade group. “The changes are intended to put the program back on track and encourage people to take what they need and no more.” 




source: http://www.nytimes.com/2013/09/07/your-money/tighter-rules-will-make-it-harder-to-get-a-reverse-mortgage.html?pagewanted=all&_r=0




more Jim Clooney

In the aftermath of more than 2.5 million foreclosures, the Federal Housing Administration (FHA) is now offering a homeownership program that will put previously troubled borrowers on a fast-tracked return to the home ownership market. The new program, known as "Back to Work – Extenuating Circumstance," cuts the standard three-year waiting period to only 12 months.

According to Charles Coulter, HUD's Deputy Assistant Secretary for Single Family Housing,

"We understand that families occasionally experience financial difficulties that are simply beyond their control. We already have a policy allowing for exceptions to this waiting period when there is an extraordinary life event. This Mortgagee Letter is a targeted expansion of that policy.

"As part of FHA's ongoing mission" Coulter continued, "we want to make sure that qualified borrowers are not being unnecessarily shut out of the market. We 're looking forward to working with our industry partners to strengthen our housing market, to protect FHA's insurance fund, and to make certain access to credit remains available for future generations of homeowners."

That's good news for borrowers who lost their home because of specific financial hardships but can now demonstrate they have regained previously lost financial ground. The list of eligible financial hardships reads like a list of housing crisis woes:

Chapter 7 or Chapter 13 bankruptcy
Deed-in-lieu
Forbearance
Foreclosure
Loan modification
Loss of income, employment or both that totaled at least 20 percent of previous earnings for at least six months, including copies of applicable termination notices or changes in employment status
Pre-foreclosure sales
Short sales

Additionally, consumers must also meet other verifiable measures to participate in the program:

Proof of borrower's current income – usually W-2 forms or federal tax returns that show the desired mortgage would be affordable and sustainable;
Credit history pre- and post the eligible hardship event that is free from late payments or other major credit issues, including rental housing payments and accounts delinquent by 30 days or more;
Credit score of at least 500; and
Housing counseling by a HUD-approved counselor at least 30 days but no more than six months before submitting an FHA application.

For consumers meeting all of these criteria as well as other standing FHA mortgage guidelines, the Back to Work program is now available nationwide through FHA-approved lenders. Once participating lenders determine that mortgage applicants meet all eligibility and policy criteria, the same 3.5 percent minimum FHA down payment requirement will apply. Mortgage insurance and closing costs will also apply.

Only one FHA program is ineligible for the Back to Work program: reverse mortgages.

Earlier research by the Center for Responsible Lending found that more than 2.5 million homes were lost to foreclosure during the housing crisis. According to CoreLogic, a firm providing data and analysis to financial services companies and real estate professionals, the number of homes in some state of foreclosure dropped below the million-mark as of July 2013, to 949,000. This figure also represents a drop of 32 percent since July 2012.

Underwater mortgages, properties that are now worth less than their purchase price, also continue to haunt housing recovery. As of May 2013, Core Logic, the firm specializing in residential property information, found that 11 states had more than 1-in-5 underwater homes. The states with the seven highest numbers of underwater properties were Arizona, Florida, Georgia, Michigan, Nevada, California and Illinois.

As CRL has stated before, the housing crisis is not yet over. But programs that enable former troubled borrowers to regain the pride of home ownership and the chance to build family wealth have to be good news

source: http://www.atlantadailyworld.com/201309038588/Business/program-returns-foreclosed-borrowers-to-homeownership

WASHINGTON — Three years ago, with his former partner suffering from cancer, Jim Dorsey decided to borrow against the equity on his Vashon Island, Wash., home with a reverse mortgage. The couple didn't have children and didn't plan to move, so a loan that didn't have to be repaid until he died seemed like a good deal.

Dorsey, 69, isn't so sure now.

The retired high-school teacher figures the loan — which netted him a $75,000 lump sum after paying off his existing mortgage — will reduce his home equity by $100,000, compared with what it otherwise might have been, if he lives another decade.

Then again, Dorsey can stay in the house for as long as he pays his property taxes and homeowner's insurance. Plus, he won't be liable for the shortfall if his final loan balance exceeds his home's value, either because of falling real-estate prices or because he lives longer than expected.

That's because almost all reverse mortgages since 1989 have been insured by the Federal Housing Administration.

The agency collects mortgage-insurance premiums from borrowers, much of which are used to make lenders whole if borrowers default or if home prices drop.

"The feds are assuming the risk," he said. "The bank is in the catbird seat."

That risk has put the FHA's reverse-mortgage portfolio $5.25 billion in the hole as worrisome numbers of borrowers fail to keep up with taxes and insurance or convey their homes to the FHA rather than go through the expense of marketing and selling their properties.

In response, Congress recently passed legislation sponsored by U.S. Rep. Denny Heck, D-Wash., allowing the FHA to fast-track changes to stem the deficit. President Obama signed the bill.

The agency plans to use the new authority to tighten lending terms that could reduce loan amounts or even disqualify some borrowers.

Among the proposed changes are requiring a review of applicants' finances before granting a loan and mandating an escrow account to set aside money for taxes and insurance.

The new rules are scheduled to take effect Oct. 1.

The legislation's passage comes on the heels of an FHA administrative action in April to steer borrowers to lower-fee, lower-payout loans to reduce stress on the agency's insurance fund.

Some consumer advocates fear the pending changes could lock seniors out of reverse mortgages or drastically lower their borrowing limits. That's a worry because retirement experts expect more pension- and savings-poor Americans to tap their home equity after paychecks end.

Heck said his legislation was a "twofer" win for seniors and taxpayers. Giving the FHA quick authority to shore up its reverse-mortgage program of Home Equity Conversion Mortgages, Heck said, protects against defaults and minimizes the tab for the Treasury.

Heck acknowledged that critics regard reverse mortgages as inherently predatory. Unlike home-equity loans, for instance, reverse mortgages carry origination fees, mortgage-insurance premiums, closing costs and other expenses.

Then there are those who believe "the FHA shouldn't even exist at all," he said.

Erin Reardon, a reverse-mortgage counselor with Solid Ground, a nonprofit anti-poverty group in Seattle, warned that the FHA's new guidelines could sow more confusion with a product that's already complicated.

Dorsey, who separated from his partner, said reverse mortgages come with trade-offs: cash now or equity later.

He said fees ate up a substantial portion of his original draw. In exchange, he can stay put in his home as long as he keeps it in good repair.

"Do you need the cash? If so, then reverse mortgages may be a sound choice," he said. "Do you value future equity? If so, then reverse mortgages may not be a good choice."
Reverse mortgage basics

Reverse mortgages can help cash-poor seniors tap the equity in their homes without moving out. But borrowers often lack a full grasp of how the loans work. They are the opposite of traditional, or "forward," mortgages: Your loan balance grows — and home equity shrinks — over time.

Who qualifies

Homeowners who are at least 62. You must be mortgage-free or have a small balance that will be paid off with proceeds from the reverse mortgage.

Borrowing limits

You can borrow against homes of any value, but loan proceeds are capped at homes appraised at $625,500. The size of the loan depends on the age of the borrower, the interest rate and required fees. But roughly, on a $200,000 home, a 65-year-old homeowner could take out about $120,000 after closing costs and other fees, depending on the terms of the loan. At 85, the same borrower could get about $155,000.

Interest and fees

Reverse mortgages have similar costs as regular mortgages. For instance, they carry origination fees of up to $6,000 on homes appraised at $400,000 or higher. On top of that, some borrowers must pay an up-front 2 percent mortgage-insurance premium, plus another 1.25 percent annually. Borrowers also incur closing costs, such as title searches, home appraisal, recording fees and mortgage taxes.

Terms

Borrowers can opt for lump-sum draws, regular payments or a line of credit. They are responsible for paying property taxes and homeowner's insurance to avoid foreclosure. The loans come due when owners move out, sell or die. The final loan balance can sometimes exceed the home's sale price. The borrowers or their heirs are not liable for the shortfall.

Source: http://www.denverpost.com/styleheadlines/ci_23880320/reverse-mortgages-likely-get-stingier-more-complex

 WASHINGTON — Three years ago, with his former partner suffering from cancer, Jim Dorsey decided to borrow against the equity on his Vashon Island, Wash., home with a reverse mortgage. The couple didn't have children and didn't plan to move, so a loan that didn't have to be repaid until he died seemed like a good deal.

Dorsey, 69, isn't so sure now.

The retired high school teacher figures the loan — which netted him a $75,000 lump sum after paying off his mortgage — will reduce his home equity by $100,000, compared with what it otherwise might have been, if he lives another decade.

Then again, Dorsey can stay in the house for as long as he pays his property taxes and homeowner's insurance. Plus, he won't be liable for the shortfall if his final loan balance exceeds his home's value, either because of falling real-estate prices or because he lives longer than expected.

That's because almost all reverse mortgages since 1989 have been insured by the Federal Housing Administration. The agency collects mortgage-insurance premiums from borrowers, much of which are used to make lenders whole if borrowers default or home prices drop.

“The feds are assuming the risk,” he said. “The bank is in the catbird seat.”

That risk has put the FHA's reverse-mortgage portfolio $5.25 billion in the hole as worrisome numbers of borrowers fail to keep up with taxes and insurance or convey their homes to the FHA rather than go through the expense of marketing and selling their properties.

In response, Congress recently passed legislation sponsored by U.S. Rep. Denny Heck, D-Wash., allowing the FHA to fast-track changes to stem the deficit. President Obama signed the bill. The agency plans to use the new authority to tighten lending terms that could reduce loan amounts or even disqualify some borrowers.

Among the proposed changes are requiring a review of applicants' finances before granting a loan, and mandating an escrow account to set aside money for taxes and insurance.

The new rules are scheduled to take effect Oct. 1.

The legislation's passage follows an FHA administrative action in April to steer borrowers to lower-fee, lower-payout loans to reduce stress on the agency's insurance fund.

Some consumer advocates fear the pending changes could lock seniors out of reverse mortgages or drastically lower their borrowing limits. That's a worry because retirement experts expect more pension- and savings-poor Americans to tap their home equity after their paychecks end.

The FHA intends to limit the amount borrowers can draw at the beginning of the loan, possibly tied to the size of the existing mortgage they need to pay off and other types of debt.

“We will get frantic calls from borrowers,” said Erin Reardon, a reverse-mortgage counselor with Solid Ground, a nonprofit anti-poverty group in Seattle. Any time rules change, borrowers are “rushed into getting the loan when they usually might have taken more time to think about it.”

The number of Americans taking out reverse mortgages fell for a third straight year to 54,591 in fiscal 2012. But that number is expected to spike in coming years as more baby boomers finance retirement.

Anthony Webb, research economist at the Center for Retirement Research at Boston College, said the need is being driven by the rising age for Social Security eligibility and inadequate savings.

But Webb put most blame on disappearing pensions. Between 1989 and 2010, the percentage of American workers with defined-benefit pensions that pay specific, promised sums fell by two-thirds to just 8 percent.

“I think more Americans, out of necessity, will turn to reverse mortgages,” he said.

Dorsey, who separated from his partner, said reverse mortgages come with trade-offs: cash now or equity later. He said fees ate up a substantial portion of his original draw.

“Do you need the cash? If so, then reverse mortgages may be a sound choice,” he said. “Do you value future equity? If so, then reverse mortgages may not be a good choice.”

Source: http://triblive.com/business/headlines/4541058-74/reverse-mortgages-borrowers#axzz2cQE9MiLT

 WASHINGTON — Three years ago, with his former partner suffering from cancer, Jim Dorsey decided to borrow against the equity on his Vashon Island home with a reverse mortgage. The couple didn’t have children and didn’t plan to move, so a loan that didn’t have to be repaid until he died seemed like a good deal.

Dorsey, 69, isn’t so sure now.

The retired high-school teacher figures the loan — which netted him a $75,000 lump sum after paying off his existing mortgage — will reduce his home equity by $100,000, compared with what it otherwise might have been, if he lives another decade.

Then again, Dorsey can stay in the house for as long as he pays his property taxes and homeowner’s insurance. Plus, he won’t be liable for the shortfall if his final loan balance exceeds hishome’s value, either because of falling real-estate prices or because he lives longer than expected.

That’s because almost all reverse mortgages since 1989 have been insured by the Federal Housing Administration (FHA). The agency collects mortgage-insurance premiums from borrowers, much of which are used to make lenders whole if borrowers default or if home prices drop.

“The feds are assuming the risk,” he said. “The bank is in the catbird seat.”

That risk has put the FHA’s reverse-mortgage portfolio $5.25 billion in the hole as worrisome numbers of borrowers fail to keep up with taxes and insurance or convey their homes to the FHA rather than go through the expense of marketing and selling their properties.

In response, Congress last week passed legislation sponsored by U.S. Rep. Denny Heck, D-Olympia, allowing the FHA to fast-track changes to stem the deficit. President Obama signed the bill Friday. The agency plans to use the new authority to tighten lending terms that could reduce loan amounts or even disqualify some borrowers.

Among the proposed changes are requiring a review of applicants’ finances before granting a loan, and mandating an escrow account to set aside money for taxes and insurance.

The new rules are scheduled to take effect Oct. 1.

Drastic changes feared

The legislation’s passage comes on the heels of an FHA administrative action in April to steer borrowers to lower-fee, lower-payout loans to reduce stress on the agency’s insurance fund.

Some consumer advocates fear the pending changes could lock seniors out of reverse mortgages or drastically lower their borrowing limits. That’s a worry because retirement experts expect more pension- and savings-poor Americans to tap their home equity after paychecks end.

Heck said his legislation was a “twofer” win for seniors and taxpayers. Giving the FHA quick authority to shore up its reverse-mortgage program of Home Equity Conversion Mortgages (HECM), Heck said, protects against defaults and minimizes the tab for the Treasury.

Heck acknowledged critics regard reverse mortgages as inherently predatory. Unlike home-equity loans, for instance, reverse mortgages carry origination fees, mortgage-insurance premiums, closing costs and other expenses. Then there are those who believe “the FHA shouldn’t even exist at all,” he said.

Conservative congressional Republicans want to greatly pare back the federal government’s role in insuring private mortgages, including returning the FHA to its original mission of focusing on low-income and first-time buyers.

More complication ahead?

Erin Reardon, a reverse-mortgage counselor with Solid Ground, a nonprofit anti-poverty group in Seattle, warned that the FHA’s new guidelines could sow more confusion with a product that’s already complicated.

Reverse mortgages are available to any homeowner 62 or older. Borrowers receive a portion of the home’s appraised value, with older seniors allowed to tap more equity. The loans do not have to be repaid until borrowers die, move or sell. They are the opposite of traditional mortgages: Loan balances grow, not shrink, with interest, over time, chiseling away equity.

Reardon said one of the attractions of reverse mortgages is that they do not require credit histories or sufficient cash flow. She’s waiting to find out whether the FHA’s new financial-assessment rules might knock out potential borrowers.

Reardon also worried that mandatory reserves for taxes and insurance might leave some seniors with little or nothing from their home equity. The FHA has not issued formal guidelines, but agency officials have indicated the escrow set-asides could equal two years’ worth of taxes and insurance or even cover the full duration of the loan, which can last 30 years or longer.

As of February 2012, a record 54,000 borrowers, or 9.4 percent of reverse-mortgage holders, were at risk of foreclosure because they failed to keep up with property taxes and homeowner’s insurance.

The FHA also intends to limit the amount borrowers can draw at the beginning of the loan, possibly tied to the size of the existing mortgage they need to pay off and other types of debt.

“We will get frantic calls from borrowers,” Reardon said. Any time rules change, borrowers are “rushed into getting the loan when they usually might have taken more time to think about it.”

Hard-pressed retirees

The number of Americans taking out reverse mortgages fell for a third straight year to 54,591 in fiscal 2012. But that number is expected to spike in coming years as more baby boomers finance retirement.

Anthony Webb, research economist at the Center for Retirement Research at Boston College, said the need is being driven by the rising age for Social Security eligibility and inadequate savings.

But Webb put most blame on disappearing pensions. Between 1989 and 2010, the percentage of American workers with defined-benefit pensions that pay specific, promised sums fell by two-thirds to just 8 percent.

“I think more Americans, out of necessity, will turn to reverse mortgages,” he said.

Dorsey, who separated from his partner, said reverse mortgages come with trade-offs: cash now or equity later. He said fees ate up a substantial portion of his original draw. In exchange, he can stay put in his home as long as he keeps it in good repair.

“Do you need the cash? If so, then reverse mortgages may be a sound choice,” he said. “Do you value future equity? If so, then reverse mortgages may not be a good choice.”

Source: http://seattletimes.com/html/localnews/2021579933_reversemortgagexml.html

A reverse mortgage can be an economic lifeline for senior homeowners on fixed incomes that don’t meet basic living expenses. A reverse mortgage is a home loan that allows seniors to draw on the equity in their homes without having to make payments as long as they live in their homes. Should home values decline, a reverse mortgage protects their equity.

HistoryCongress authorized the Federal Housing Administration to offer reverse mortgages through a demonstration project in 1989. In 1990, reverse mortgages expanded into all markets, and in 1998 were made permanent. Although private lenders can offer reverse mortgages, they do not offer the government-backed insurance that the FHA does. The insurance protects the lender from home values that don’t appreciate enough to cover the loan balance, and protects borrowers who take their loans in the form of monthly payments or credit lines from banks that may fail and go out of business. Not surprisingly, FHA loans are the source of most reverse mortgages.

ProcessAny homeowner age 62 or older can apply for a reverse mortgage. The maximum loan available for an FHA loan depends largely on the lesser of home value or a regional cap set by the FHA. The cap often approximates local median home prices. Another factor that influences the loan amount is borrower age; the older the borrower, the more money he can borrow. The interest rate at the time and the loan type will also have some effect; the higher the rate, the less a homeowner can borrow. The loan is repaid after the homeowner moves away for a period of 12 consecutive months, sells the home or dies. Generally, the home is sold to make the repayment. A reverse mortgage is a non-recourse loan, meaning neither the homeowner nor his heirs are responsible for any part of the loan that cannot be repaid from equity in the home.

OptionsA reverse mortgage may be taken out as a lump sum, a line of credit, monthly payments or some combination of these options. The lump sum can be based on an adjustable or a fixed interest rate. The line of credit and monthly payments are based on an adjustable rate. Although no repayments of the loan are required while the borrower remains living in the home, there are also no prepayment penalties. This means that the borrower can choose to make interest or principal payments if he wishes--an option that may make sense if he comes into a windfall and wants to preserve equity in the home for heirs.

AdvantagesThe biggest advantage to a reverse mortgage is that no payments have to be made while the borrower remains living in the home. If the borrower uses the reverse mortgage to pay off his existing mortgage, his expenses go down. If he started out lien-free, his income goes up. Either way, the borrower ends up having greater flexibility in his monthly budget. If the home value declines, he is also protected. The loan amount is based on the value of the house at the time of loan approval. If the home price declines, the borrower can hang onto the lump sum, line of credit or monthly payment. If the home value rises tremendously, he or his heirs will also benefit from equity that may remain in the house after the loan is repaid.

DisadvantagesReverse mortgage loan costs are high, interest compounds on the loan balance and equity must be significant to make use of the loan. These are all disadvantages of the reverse mortgage. Closing costs associated with a standard mortgage run, on average, $3,741. The same costs associated with a reverse mortgage can be as high as $20,000. Because no payments are made on the loan, interest compounds on the principal. The resulting final loan balance can be several times the original loan amount, leaving little or no equity for heirs. The formula determining the maximum loan amount typically yields a figure of about 50 to 60 percent of the home value. If the borrower already owes 80 percent of the home value on an existing mortgage, he cannot take out a reverse mortgage because all existing liens must be repaid before approval or with loan proceeds.

Source: SF Gate

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