New rules rolled out by the U.S. Department of Housing and Urban Development (HUD) over the next couple of months will make reverse mortgages for senior citizens safer.
Starting Aug. 4, reverse mortgages backed by the HUD, which is about 98 percent of the market, will be required to have the names of both spouses on the mortgage.
A reverse mortgage allows homeowners who are 62 or older to borrow against the equity in their homes without having to make payments, provided that the home remains their primary residence. Once the homeowners move or die, the loan must be paid back or the house is turned over to the lender.
Previously, only one spouse’s name was required on a reverse mortgage, which bases the amount of equity being cashed out on the age of the applicant. If the younger spouse was not yet 62, their name might be left off the mortgage so the couple to receive more money. But this could result in the younger spouse having to pay off the mortgage or be evicted from the house when the older spouse dies.
“This is good news for the industry,” said Scott Norman, a board member for the Reverse Mortgage Brokers Association and national sales manager for Urban Financial, a leader in reverse mortgage lending. “HUD should be applauded for this common sense rule.”
Norman said evictions of younger spouses not listed on titles was not widespread.
“But if we’re talking about your mom or dad, it was a problem,” he said.
Kara Smith, a HUD-approved reverse mortgage counselor with Housing Opportunities of Fort Worth, said she came across the problem with her client base about once every six months.
“Whenever you had one spouse younger than the other and you took the spouse not old enough to qualify for a reverse mortgage off the title, you opened up a whole can of worms,” she said. “It’s very dangerous and I urged them never to do that.”
The new ruling comes after a lawsuit filed by AARP, Smith said.
In the lawsuit, two widowers faced foreclosure and eviction because they could not pay a reverse mortgage loan when their spouses died. The widowers won the lawsuit earlier this year, which resulted in the AARP Foundation filing a class-action suit on behalf of all widowed homeowners harmed by HUD’s previous reverse mortgage policy.
Smith said that the new rule does not cover prior reverse mortgages done with one spouse’s name, just new ones going forward. The only choice for those who have already set up reverse mortgages with one name is to refinance, she said.
“You cannot add anyone back onto the title,” she said.
HUD also will be implementing new financial assessment rules on underwriting of the reverse mortgage borrower beginning sometime this fall, Norman said.
The new rules require a financial analysis of reverse mortgage applicants to make sure they have enough income to cover their personal expenses, along with property taxes, home insurance and home upkeep required with a reverse mortgage.
Last year, HUD began a two-pronged effort to restrict the loans in an effort to lower a high foreclosure rate. At the time, one in ten reverse mortgages were in default and the Federal Housing Administration (parent of HUD) said it needed $1.7 billion from the Treasury to cover losses in its reverse mortgage program.
The FHA created new guidelines that reduced the amount of money that could be taken out of a home in a reverse mortgage by about 15 percent and restricted the amount that could be taken out in the first year. Now tighter financial underwriting will be done on the loans.
“HUD wanted counselors and loan officers to crack down on the borrower’s financial test to make sure the loan was not setting them up for failure,” Smith said. “We already do a budget with them to see if they are not able to pay taxes and escrow. Our job is to point out that this loan is too risky if they don’t have the financial worthiness.”
Smith said the issue is not whether they are credit worthy of a reverse mortgage, rather if they have the income to support maintaining a house.
“It’s more of a liquidity test so they can maintain their obligations in the future,” she said. “There is a niche of people who never learned to manage their money. They need some protection. They act like they’ve won the lottery when they get a reserve mortgage and spend all their money right away.”
This causes a cash flow problem for paying the required annual expenses of property taxes, home insurance and maintenance needed with a reverse mortgage, she said.
Norman said the new underwriting rules should go into effect in the next 60 days.
“Reverse mortgages are almost a new product from where they were five years ago,” Norman said. “There are so many more options available and so many more consumer protections than before.”