What Advisors Need to Know About the New Reverse Mortgage Rules

Using Reverse Mortgages as an Estate Planning Tool

Estate planners may want to consider reverse mortgages as a risk management tool, Stammers said. If a planner thinks a home is highly valued but doesn’t expect a lot of appreciation, “you get a lot of money upfront, and the bank takes the risk,” he said.

“Or, if the home is undervalued, and you can’t sell the house now, then take out the reverse mortgage and wait for it to appreciate,” Stammers said. “That’s an estate planning tool that families can use, although reverse mortgages have a large prepayment penalty in the first three years.  But if the housing market is doing well and you think there’s not much appreciation left, that’s a great time to do a reverse mortgage, because you’re putting the risk of the loan on the lender.”

Because of the current low-interest rate environment, a lot of borrowers are turning now to reverse mortgages, and if a family does go with a reverse mortgage for an aging relative, when the borrower dies and the estate pays for loan, the government has to pay for the loss position, Stammers said.

“This is a great benefit of the loan because you or your estate will never be in a loss position when the borrower vacates the home,” he said. “Another benefit is that the cash coming from the home is tax-free. But be aware that there won’t be a lot of equity when you leave. The home isn’t something you’re likely to pass on in your estate.”

According to the National Reverse Mortgage Lenders Association’s summary of the HECM changes, HUD revised its rules because, since the 2009 housing crisis, the HECM program has experienced major demographic and behavioral shifts that have increased the risk of losses to the program. In announcing the changes, HUD officials said, “these critical program changes will realign the HECM program with its original intent, and thereby aid in the restoration of the Mutual Mortgage Insurance Fund and help ensure the continued availability of this important program.”

The association lists these major changes to the HECM program:

• A restriction on the amount of funds that can be disbursed at closing or during the initial 12 months after closing
• A mandatory financial assessment for every prospective borrower
• Establishment of set-aside accounts to pay mandatory property charges, such as property taxes and homeowners insurance, for borrowers who pose a future risk of defaulting on their reverse mortgages
• Adoption of a single disbursement lump sum option
• Institution of a new upfront mortgage insurance premium structure
• Elimination of the HECM Standard and Saver programs
• Changes to the Principal Limit Factor (PLF) tables that determine how much money a borrower is eligible to receive

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Read Reverse Mortgages and Retirement Planning: Bridging the Income Gap by Thomas Jefferson School of Law professors Robert Bloink and William Byrnes at ThinkAdvisor.