New Reverse Mortgage Rules Will Impact Reverse Mortgages in New Jersey
5 minute read
January 15, 2014


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The Reverse mortgage product landscape is about to change. On June 28, 2012 CFPB (consumer finance protection bureau) issued a 200+ page report detailing many of the issues that are currently being dealt with in the reverse mortgage market.  The report states, “The original purpose envisioned for reverse mortgages was to convert home equity into cash that borrowers could use to help meet expenses in retirement. Borrowers could choose between an income stream for everyday expenses, a line of credit for major expenses (such as home repairs and medical expenses), or a combination of the two. It was anticipated that most, though not all, borrowers would use their loans to age in place, living in their current homes for the rest of their lives or at least until they needed skilled care. Upon the borrower’s death, or upon leaving the home, the borrower or the estate would sell the home to repay the loan and would receive any remaining home equity.”  Thus, the initial concept of the reverse mortgage was to be more-or-less a back up safety net or a supplemental cash flow tool.  However, the report findings were contrary to these initial design elements.  According to the report, “most of today’s reverse mortgage borrowers do not use their loans to convert home equity into an income stream or a line of credit. Borrowers also do not typically live in their current homes until the end of their lives. Borrowers today are increasingly taking the full amount for which they qualify upfront as a lump sum. In many cases, borrowers are using that money to refinance an existing mortgage or other debt early in their retirement or even before reaching retirement. By refinancing with a reverse mortgage, these borrowers eliminate their monthly mortgage or debt payments, but the interest on the loan will chip away at their remaining home equity over time. In other cases, borrowers may be saving or investing the lump-sum proceeds, and may be earning less than they are paying in interest.”  In fact, “Reverse mortgage borrowers are withdrawing more of their money upfront than in the past. In FY2011, 73 percent of borrowers took all or almost all of their available funds upfront at closing. This proportion has increased by 30 percentage points since 2008.”  Taking out a massive lump sum again, runs contrary to reverse mortgage concept’s initial design.  Perhaps, there is an instance where the lump sum option may be the way to go however the rising use of this option is likely a sign of misuse and poor financial foresight.  After January 2014 you won’t have to worry about this anymore because the lump sum option will go the way of the dinosaur.  Further changes will include combining the HECM Standard and the HECM Saver into one loan product and reducing the amount of equity that a borrower can access through the loan.  The last major change that is coming is in the underwriting department.  Previously a reverse mortgage did not require any true underwriting requirements it was simply a matter of age and equity in the house however going forward the FHA wants to make sure that borrowers have the financial responsibility via their credit history to be able to make payments for both their taxes and insurance.  This new twist will reduce the number of borrowers who qualify for the program but the FHA has to plug a 16.3 billion dollar shortfall in their insurance fund and many foreclosures in the reverse market have come due to unpaid tax and insurance bills.  Real Estate agents–don’t fret, although the coming changes will make things a bit more involved using a reverse mortgage can still be a lifesaver for many of your clients.  It is important that a long term strategic view of the situation is at the core of the decision making process.  Many times it can help an elderly parent (80 years old or >) continue to live in a home they may be unwilling to leave.  It can provide the funds necessary for daily care they may need.  This is what the reverse mortgage was intended for and this is the kind of situation where it is ideally utilized.   The purchase money reverse mortgage best used in a downsizing situation (sell big old house buy new small one) is also another tool your clients may be able to take advantage of to improve their long term financial strategy.  CRS agents who want to work with clients who are interested in exploring a reverse mortgage should begin with doing some research and reading on the subject.  Next, speak with a mortgage broker who originates reverse mortgages to find out the real-time details of what the current rules happen to be (the new changes have not all been implemented yet and mortgage originators are also dealing with QM and QRM which is set to roll out on January 10th 2014 for forward mortgages).  The reverse mortgage will still be a great product when used properly in the right situation, helping your clients identify what their unique situation is will make all the difference.

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