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Reverse Mortgages: Impact Of New Rules On Borrowers

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R ecently, the Federal Housing Administration (FHA) tightened eligibility requirements for the most common reverse mortgages -- Home Equity Conversion Mortgages (HECM), FHA-insured loans from banks and mortgage brokers.

With an HECM loan, homeowners 62 and older can tap some of the equity of their principal residence for money to live on. They can also use it to pay their regular mortgage. These can expand people's retirement planning flexibility.

An HECM is repaid with interest in a lump sum by the borrower or his or her heirs when the borrower dies or stops living there.

The annual percentage rate now for an HECM ranges from about 2.77% on an adjustable rate loan to about 5% for a fixed rate loan, according to the National Reverse Mortgage Lenders Association.

The loans can be a financial lifeline for some seniors. But they come with drawbacks. Borrowers or their survivors must pay off an HECM loan before anyone can inherit the home. To avoid foreclosure, they have a year to repay after the borrower dies or stops living there.

Borrowers can also get hit with origination fees and closing costs.

One key rule that was recently tightened capped initial loan amounts. And this year, borrowers' finances began to be put under the microscope.

Now, some observers say, HECMs may appeal less to some consumers. And especially with the new financial disclosure rule, the neediest borrowers could be denied loans.

Recent Revisions

Since April 27, applicants for HECM loans must undergo a financial assessment of their ability and willingness to meet the terms of the loan. Applicants now must document timely payment on their homeowners' insurance, property taxes, homeowners' association fees and related housing charges during at least the last two years.

If they missed any payments, they must explain why.

In addition, they must verify their income and financial assets and go through an analysis of their expenses and cash flow. Also, they must meet minimum net income requirements, showing how much disposable income they have after taxes, insurance, utility bills and so on.

What if an applicant has missed payments of property tax or insurance or does not have enough net income? Such perceived-to-be risky applicants may still get a loan if a portion of it is put into a set-aside account for payment of future property taxes and insurance.

But critics say that if this set-aside is too large, it may cut the appeal of reverse mortgages.

Another major HECM change in late 2013: The FHA capped at 60% the amount that borrowers can access of their loan in the first year. An exception: If paying off obligations like the regular mortgage would eat up that 60% allowance, then the borrower can get an additional 10%.

Still, a borrower going this route must pay a higher upfront mortgage insurance rate.

In the short-term, these key changes could trim demand for HECM loans, says Prof. Stephanie Moulton, a reverse mortgage expert at Ohio State University.

But over time, changes may lessen negative perceptions, including costliness, of HECM loans. They also may lift demand among a segment of seniors who see reverse mortgages as part of a longer-term financial plan.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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