If I were to track my phone usage for the last ten years, May 2016 probably was the busiest. I seemed I received hourly phone calls from loan originators, financial services professionals, the media, and of course older homeowners, all asking the same complex questions:
- What are the positive changes about which I’m hearing?
- What did recent regulatory changes accomplish?
- What are the strategic financial planning strategies that have emerged?
Now, we are faced with NEW proposed regulatory changes to the Home Equity Conversion Mortgage, the federally-insured reverse mortgage product also called a “HECM.” The questions have intensified. But these questions cannot be answered in one blog, and they certainly cannot be answered in a quick phone call. However, I update my book, Understanding Reverse, each year to answer these questions in the best way possible.
My take on the past changes
The truth is this: The HECM reverse mortgage product was awesome BEFORE 2013… if the right homeowner was obtaining one. FHA and HUD didn’t necessarily make the product “better” for everyone over the last three years. But, they did clarify who should be obtaining one, and for what reasons.
The HECM is now less desirable for those that wish to use the program poorly (e.g. massive cash-out refinancing). This shift has made the product safer for the Mutual Mortgage Insurance Fund (MMIF) that insures it.
Action was also taken to significantly reduce technical defaults, like foreclosures due to delinquent property charges. In addition, many non-borrowing spouses are now protected as “homeowners.”
These are generally good things, and because of Financial Assessment, the reverse mortgage is now only being used as a sustainable solution for the RIGHT homeowners. For all historians out there, here is a brief timeline:
2013 Initial Disbursement Limits
Unless homeowners are paying off large loan balances, they will now have access to only 60% of their principal limit at closing, or within the first year of a HECM ARM.
2014 Non-Borrowing Spouse Regulations
If a spouse is not 62 at the time of closing, he/she can’t be a party to the reverse mortgage. This posed a problem, as the loan became “due and payable” at the time the last borrower passed away. Now, non-borrowing spouses, who are married at the time of application, and reside in the home, may be eligible to defer the “due and payable” status of the loan upon the death of the borrowing spouse.
2015 Financial Assessment
We must now examine a borrower’s credit and property charge history, and calculate their residual income. The results are used to determine if a Life Expectancy Set Aside (LESA) will be required to ensure property charges are always paid.
2016 and Beyond
HUD’s most recent proposed changes cover a broad spectrum of reverse mortgage issues. Consequently, they are harder to label. Their stated purpose is to strengthen the HECM program and to “codify several significant changes to FHA’s Home Equity Conversion Mortgage program.” This means they want to add the recent changes to the Code of Federal Regulations, as well as propose a few more changes, opening them up for comment.
What are the new changes? We’ll likely see a minor, yet welcome, enhancement to the HECM for Purchase program. This change may allow the seller to pay certain fees including a home warrantee policy. HUD is also clarifying what is included in origination fees, and changing the way we lock-in the expected rates for borrowers.
As a result of these regulatory updates, the reverse mortgage program of today is almost unrecognizable from previous versions. The product has shifted from “crisis management” strategies to “retirement cash-flow” strategies. The downside is that these enhancements have caused a significant reduction in the number of reverse mortgages offered. Yet, during a time of declining numbers, the “NEW Reverse Mortgage” has been viewed more positively by the media and the financial planning community.
So there you have it – my take on recent changes and the ones to come this fall. While the changes offer some consumer protection, in many cases they simply steer a complex and controversial industry in a direction that makes it safer for FHA, and attempts to neutralize issues that create bad press.
For more information on the reverse mortgage product and its recent changes, please purchase Understanding Reverse. For updates on the newest round of changes, stay tuned by subscribing to this blog.