Heads up, advisors: get ready to field more questions from clients about the pros and cons of reverse mortgages.
With the U.S. population aging and more boomers turning to reverse mortgages to fund their retirement, the U.S. Department of Housing and Urban Development has announced major changes to its Home Equity Conversion Mortgage program. The changes, most of which became effective on Sept. 30, are designed to prevent borrowers from tapping into the entire value locked into their homes. Specifically, new limits have been placed on the amount that borrowers can take out during the first year.
The product is touted as a safe way to finance a retirement or pay down debt, but the CFA Institute warns that prior to the new rules, seniors were taking out these loans, spending the funds, then defaulting on their mortgages when they became unable to pay property taxes and homeowner’s insurance.
Under the new rules, intended to remedy that problem, 60% is the most money a borrower can receive in the first 12 months after closing.
CFA Institute: New Rules Protect Consumers
HUD changed the rule not only to cut down on borrowing but to bring more transparency to the product and to protect consumers, said Bob Stammers, a chartered financial analyst and director of Investor Education at CFA Institute, in a phone interview on Tuesday. Reverse mortgages are increasingly promoted by lenders for baby boomers 62 and older who are house-rich but cash-poor.
“Reverse mortgages are often misunderstood by the seniors,” Stammers said. “The biggest change is that the program will be seen less as an emergency fund and more as a tool to allow seniors to use the reverse mortgage as a retirement fund over time. There’s a penalty for taking out a large portion of the loan upfront, and that’s on purpose, to encourage use of reverse mortgages as a financing tool in retirement rather than a funding source of last resort.”
In announcing the HECM program changes, Federal Housing Commissioner Carol Galante pointed to the problem of younger borrowers with more debt and stagnant home prices having contributed to the program’s added risk. “Our goal here is to make certain our reverse mortgage program is a financially sustainable option for seniors that will allow them to age in place in their own homes,” Galante said in a statement.
Mandatory counseling by HUD-appointed counselors is a must, said Stammers, who also urged borrowers to seek help from their financial advisors before applying for a reverse mortgage.