Reverse mortgages used to come with a pitfall that could force a widow or widower out of a home.
Many couples had been advised by mortgage brokers to take the younger spouse off the title in order to get a higher payout, since the age of the individuals on the mortgage is used to determine the amount of the reverse mortgage. But once the older spouse died, the surviving spouse could face foreclosure because his or her name was not on the mortgage.
That will no longer happen under new rules for reverse mortgages that went into effect on Aug. 4 to protect surviving spouses.
“With the new rules, if a spouse who took out the reverse mortgage passes away, the surviving spouse can still live in the house without the threat of foreclosure if they continue to pay the taxes and insurance payments,” said Don Frommeyer, president of the National Association of Mortgage Professionals in Plano, Texas.
“Previously, the surviving spouse was responsible for paying off the loan and would often face foreclosure,” he said.
Howls of protest from spouses left out in the cold prompted AARP Foundation Litigation to file a class action lawsuit against the U.S Department of Housing and Urban Development. The lawsuit alleged that HUD was not protecting widows who found themselves in that predicament. A court ruling in September 2013 led to regulatory changes that will now help surviving spouses stay in their homes.
Reverse mortgages are available to homeowners 62 years old and older with significant home equity. Reverse mortgages allow retirees to borrow against the equity in their homes without having to make monthly payments as they would with a traditional mortgage or home equity loan.
Under a reverse mortgage, funds are advanced to the homeowner and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells the home or passes away. Borrowers can take their loan as a lump sum, establish a line of credit or request fixed monthly payments from the lender.
Peter Bell, president and CEO of the Washington, D.C.-based National Reverse Mortgage Lenders Association, said that while he understands the need for the rule change, it will lead to many households receiving lower payments on reverse mortgages.
Mr. Bell said the Federal Housing Administration is making an insurance guarantee on a loan that is based on life spans. Therefore if you make the reverse mortgage loan to an 80-year-old it will be for a shorter term than it would be for a 72-year-old. Lenders thus can give the 80-year-old more money because there will be less interest accruing on the loan during that person’s life span.
“Couples have been getting more money from reverse mortgages by taking the 72-year-old person off the loan,” Mr. Bell said. “The courts have come along now saying that HUD is wrong [for its age-based lending policies]. I personally feel the judge has failed to recognize the actuarial underpinnings of the reverse mortgage program.
“Going forward, couples will have to take the lower loan amount no matter what the circumstances,” he said. “If you are underwriting a loan for someone at an older age, but you extend the benefit to someone of a younger age, you are setting up for a potential loss. Now we write reverse mortgages to the younger age no matter what.”
Seniors also will be able to access less of their home equity under the new rules. For example, in the past, a husband age 65 would have been able to cash in about 54.1 percent of his home equity. Now, if his wife is age 60, when her age is factored in, he could only borrow about 51.1 percent of the home’s equity in a reverse mortgage.
The new rules are not retroactive.
Couples who already have a reverse mortgage where one spouse is not named in the documents should check with a lawyer or their lender.
There are many instances where reverse mortgages are beneficial, especially when older couples have lots of equity in their homes but not enough cash flow. The stigma that used to be attached to reverse mortgages has, for the most part, tapered off as government oversight has made them safer and the loans themselves have become more mainstream.
Once all the owners on the mortgage have left the house, the lender must be repaid the amount that was borrowed plus interest. If family members chose not to buy the house back from the lender, the lender has a right to sell the home to settle the debt.
“The old market for reverse mortgages was widows and widowers and people with a house, but no money,” said Gerald Wagner, president of Ibis Software, an Alameda, Calif.-based company that specializes in reverse mortgage analysis. “The new market is people who have retirement portfolios and want to plan for the future.”
Tim Grant: email@example.com or 412-263-1591.