The changes in 2013 were major, and were the most significant changes since the first HECM was originated in 1989. Fortunately, the changes of the last two years strengthened the HECM program and added more consumer protections.
– Understanding Reverse – Page 121
Nearly all reverse mortgages are insured by The Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). They, along with the Consumer Financial Protection Bureau (CFPB), are authorized to alter the guidelines that govern the way Home Equity Conversion Mortgages are offered.
As a reverse mortgage professional, these changes require me to adjust the way I educate my clients. Change is often positive, even when the improvement is not easily recognized. As an optimist, I feel compelled to dig until the advantage is found. Unfortunately, many homeowners I encountered in 2014, may not qualify in 2015. This isn’t necessarily intended to create a sense of urgency, but it means we need to continue to educate. Allow me to summarize these changes for you:
The changes in 2013 were designed to strengthen the program and restore it to its original intent. They included initial disbursement limits that restrict the amount that can be drawn at closing or during the first year. Homeowners are no longer allowed to consume ALL of their available funds upfront unless those funds are needed to pay off “mandatory obligations” – items that must be satisfied when the loan funds. This change highlighted the product’s financial planning advantages, and was necessary to encourage a more prudent method of converting home equity.
FHA also established Initial Mortgage Insurance Premiums (IMIP) that are either HIGH or LOW depending on the amount of principal needed upfront. This change was necessary to account for the added risk FHA faces when borrowers quickly tap more than 60% of their funds.
Significant changes occurred in the summer that were designed to protect spouses who were not HECM borrowers, and therefore not on the home’s title. Qualified non-borrowing spouses may now stay in their home after the death of the last borrower, and defer the “due and payable” status of the loan.
The year ended with another little-known change – seasoning requirements for liens that are paid off with reverse mortgages. After December 15, 2014, applicants will be unable to pay off recently acquired debt using a reverse mortgage. If the debt is secured by their home, and exceeds $500, they will have to wait 12 months.
There are more changes announced in 2014 that are about to be implemented. On March 2, 2015, applicants will then be required to undergo a financial assessment to determine if they have demonstrated the willingness and capacity to pay their required property charges. Historically, credit, income, and assets were inconsequential when underwriting a reverse mortgage loan. After all, reverse mortgages do not require regular monthly principal and interest payments. FHA’s primary concern, however, is that the reverse mortgage is the ideal permanent solution for the homeowner, not a temporary fix. As a result, lenders will need to collect and evaluate documents that have been traditionally required on the forward side.
The reverse mortgage program is constantly evolving, keeping lenders, trainers, industry professionals, and bloggers on their toes. These changes are necessary for either consumer protection or the long-term protection of this financial tool. The end of the year is a good time for reflection, however, and to make the most of 2015, we need to understand the lessons of the past and educate ourselves on the guidelines of the future.
To learn more about reverse mortgage guidelines and the advantages they offer older homeowners, please purchase a copy of my book, Understanding Reverse.