Reverse mortgages have mystified and befuddled older homeowners
for too long. Now, with significant changes in the FHA Reverse
Mortgage program, it’s a worthy method to consider for improved
cash flow when needed. BY M A R K E S H E L M A N , C S A
[ emerging trends ]
The New Reverse
Mortgage:
How These
Loans Work
T
he subject of reverse mortgages has long been
riddled with misinformation, misunderstanding, and myth. But recent changes in reverse
mortgages and new program guidelines make the
new reverse mortgage worth considering. Financial
advisors can now more confidently recommend FHA
Reverse Mortgages to improve the cash flow of their
older clients when appropriate.
Unfortunately, in recent years the media has not
painted a very flattering picture of the reverse mortgage loan program. Fortunately, things have changed.
There are now many new ways a reverse mortgage
can be used to help make life easier and safer for an
older homeowner. The National Reverse Mortgage
Lenders Association (NRMLA) didn’t think the
general public knew enough about the new safety
features of today’s reverse mortgage. That’s why in
the summer of 2014 they launched a pilot program
of radio, TV, and Internet commercials, along with
some print media focused in test markets in Philadelphia, Denver, and Seattle. These commercials were
designed to educate older homeowners and their
families about the new, safe ways a reverse mortgage
can be used. Take the time to inform yourself about
CSA JOURNAL 62 / SPRING 2015 / SOCIETY OF CERTIFIED SENIOR ADVISORS / WWW.CSA.US
PAGE 5
the new reverse mortgage, without a sales pitch by
visiting NRMLA’s new website with its Smart Choice
theme: www.newreversemortgage.org.
In today’s reverse mortgage landscape, more than
90 percent of these loans funded are insured by the
Federal Housing Administration (FHA). The FHA
reverse mortgage is called the Home Equity Conversion Mortgage (HECM). The HECM came into being in 1988-1989 at the urging of President Ronald
Reagan. He and the White House Council on Aging
saw the reverse mortgage program as a great financial
instrument in helping older home owners age in place
successfully. Since 1989, the HECM has become the
most popular reverse mortgage because of the insurance backing it receives from the federal government,
the ease of qualifying, and the most flexible payback
plan imaginable.
What is a reverse mortgage? In a nutshell, the
HECM reverse mortgage enables homeowners who
are sixty-two and older to access a portion of their
home’s equity without the requirement of making
monthly mortgage payments as long as they live in that
home. HECM borrowers are still the owners of their
homes, so they must continue paying property taxes,
home insurance, and any other applicable property
charges. The money received from a reverse mortgage
is tax-free and homeowners may use the funds in any
way they choose. The HECM reverse mortgage has a
non-recourse feature, meaning that homeowners, and
their heirs, are never responsible for paying back more
than what their home is worth at the time it’s sold.
This is because the FHA mortgage insurance protects
the homeowner and the reverse mortgage lender.
During the U.S. credit crisis in 2007-2009, there
was concern that the HECM program may not have
enough funds to continue insuring all of these reverse
mortgages. Something needed to be done to protect
the program and keep it available for the upcoming
baby boomers who would begin retiring in 2011. For
the record, that’s ten thousand baby boomers turning
sixty-five each day for the next eighteen years.
In August 2013, Congress passed and President
Obama signed the Reverse Mortgage Stabilization
Act of 2013. This amendment authorizes the Secretary
of Housing and Urban Development to “establish, by
notice or mortgagee letter, any additional or alternative
requirements that the Secretary, at the Secretary’s discretion, determines are necessary to improve the fiscal
safety and soundness of the program.”
There were several areas the Secretary decided were
of critical importance to “realign the HECM program
with its original intent, and thereby aid in the restoration of the government’s Mutual Mortgage Insurance
PAGE 6
Fund, and help ensure the continued availability of
this important home loan program.” The key areas to
address were as follows:
1. Reduction in the Principal Lending Limits. (Enacted on September 30, 2013.)
2. Restricting the Initial Disbursement limits. (Enacted on September. 30, 2013.)
3. Addressing the Non-Borrowing Spouse (NBS)
homestead rights. (Enacted on August 4, 2014.)
4. Implementing a Financial Assessment. (Expected
enactment, April 27, 2015.)
Reduction in the Principal Lending
Limits
Prior to September 30, 2013, sixty-two-year old
homeowners could borrow up to 61.9 percent of the
appraised value of their home with the HECM. If
the borrowers chose to take the full draw of funds
that was available to them, it was likely they would
be left with little to no equity in their home by the
time they reached the ages of eighty-one to eightyfour (this is based on an annual home value appreciation of 4.0 percent each year.) As of today, the
average American life expectancy is approximately
eighty-two years. If the FHA continued to allow
this type of borrowing, they would not have enough
money in the Mutual Mortgage Insurance Fund to
pay all of the projected claims.
With a HECM, borrowers are never required to
pay back more than what their home is appraised at
the time the home is sold. For example: If an eightyfive-year-old borrower who had a reverse mortgage
sold her home with an outstanding reverse mortgage
balance of $250,000, but her home could only sell
for $200,000, the servicing lender would be shorted
$50,000. That’s where FHA comes in. FHA insures
that the homeowner is only required to pay back the
outstanding loan balance or 95 percent of the appraised value—whichever is less. In this case, where the
home can only sell for $200,000 (this price/value must
be confirmed by an FHA appraiser), the homeowner
only has to pay back 95 percent of the $200,000 sale
price, which comes out to $190,000. Since the servicing lender will now be shorted $60,000, FHA must
pay the difference to the lender for the borrower.
The homeowners were able to borrow their home
equity with an income-tax-free HECM, didn’t have
to make any monthly mortgage payments for years,
maybe even decades, and still not have to repay the
entire loan since their home wasn’t worth enough. This
scenario is great for the borrower, but very expensive
for FHA. With the influx of baby boomers and more
HECM borrowers taking lump-sum distributions at
earlier ages, FHA could see the handwriting on the
wall and its message was loud and clear: FHA could
not afford this.
The Solution. Effective September 30, 2013, FHA
reduced the HECM Principal Limits from 61.9 percent for a sixty-two-year-old borrower down to 52.4
percent. For a ninety-year-old or older borrower, the
Principal Limits were reduced less, from 77.6 percent
down to 75 percent currently. Older HECM borrowers can access a larger percentage of their home’s equity. FHA also increased their Initial Mortgage Insurance Premiums by 0.50 percent. The last part to this
solution was putting some restrictions on how much
money borrowers could draw within the first twelve
months of their HECM being opened.
Restricting the Initial Disbursement
Limits
There was another concern for the HECM loan program. Strong evidence showed that borrowers who
withdrew the majority of their HECM loan proceeds
within the first twelve months of opening their loan,
were much more likely to default on paying their property taxes, homeowner’s insurance, or other property
charges in the future. Borrowers who fail to pay these
property charges put themselves at risk of foreclosure.
Foreclosing on an older homeowner is the last thing
any lender wants to do, but it was happening too often.
In a detailed report in 2014 prepared by Stephanie
Moulton of the John Glenn School of Public Affairs,
along with Donald Haurin and Wei Shi of Ohio State
University’s Economics Department, showed that 9.4
percent of all HECMs are currently in default. The
most prominent cause for these defaults was HECM
borrowers not paying their property charges on time.
According to HUD, property charges include property
taxes, hazard insurance premiums, any applicable flood
insurance premiums, ground rents, condominium fees,
planned unit development fees, homeowner’s association fees, and any other special assessments that may
be levied by the municipalities or state law.
One item that Moulton and her associates discovered in their study of thirty thousand older homeowners who received counseling for a reverse mortgage,
was that by limiting the initial disbursements on a
HECM, defaults are expected to be reduced by more
than 20 percent.
In many cases when a HECM borrower defaulted, the problem was remedied by the borrower or the
WHEN A REVERSE MORTGAGE IS NOT A
GOOD IDEA.
Risky Investments. If someone advises getting
a Reverse Mortgage in order to invest into one
of their financial products or “business ideas,”
they may be trying to get the borrower to spend
their money on risky investments. Most older
homeowners don’t have the financial recovery
time to recapture any money lost on bad
investments.
Annuities. The Department of Housing and
Urban Development (HUD) has done a good job
of implementing rules to help eliminate the bad
practice of selling annuities to people choosing
to secure a Reverse Mortgage. In the past, there
were cases of unethical insurance agents and
financial advisors urging Reverse Mortgage
applicants to purchase an annuity with the loan
proceeds. This practice has been illegal since
2008. Borrowers can purchase an annuity with
their loan proceeds, but it cannot be part of the
Reverse Mortgage loan process.
Short-term uses. Using a Reverse Mortgage can
be costly for short term needs, so it’s not typically
recommended for those who plan to stay in their
home for less than two or three years. Again, a
Reverse Mortgage is not specifically designed
for short-term needs, so it’s important that all
options be considered before making a decision
Loans to friends and family members.
Borrowing money against an older person’s
home to pay for someone else’s debt is seldom
ever a good idea. Be careful to avoid untrusted
or irresponsible friends and family members who
encourage getting a Reverse Mortgage, just so
they can use the benefits for themselves.
borrower’s heirs. Sometimes the homeowner’s children
paid the property taxes or insurance to cure the default.
Other times, the problem was remedied by the borrower, or the heirs, selling the home when it became
too expensive to keep. To say that all defaults end in
foreclosure is not true. But avoiding defaults is still a
top concern for FHA, reverse mortgage lenders, and
most importantly, older homeowners.
The Solution. On September 30, 2013, FHA
set forth limitations on the amount of HECM loan
CSA JOURNAL 62 / SPRING 2015 / SOCIETY OF CERTIFIED SENIOR ADVISORS / WWW.CSA.US
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proceeds that can be advanced at loan closing, and
during the First 12-Month Disbursement Period after
loan closing. Policies were implemented that allowed
for paying off Mandatory Obligations, such as existing traditional mortgages, home equity lines of credit,
property taxes, judgments, loan closing costs, and required home repairs that can be paid at closing with
HECM loan proceeds.
After those Mandatory Obligations are satisfied,
borrowers are limited to only withdrawing up to 10
percent of their Principal Limit in additional cash at
closing. Any remaining funds in the HECM cannot
be accessed until the First 12-Month Disbursement
Period has lapsed. At that point, there are no disbursement restrictions.
To illustrate how the First 12-Month Disbursement Limit works, here’s a real-life client’s experience. The eighty-year-old client’s home in Portland
appraised at $355,000. He had an existing mortgage
balance of $110,000, on which he was paying $825
a month in principal and interest. Given his home’s
appraisal, he qualified for a $233,235 Principal Limit
(total loan amount).
The client could now pay off that existing mortgage, pay his 2015 property taxes, HOA dues, cover all
of his closing costs, and still receive over $20,000 cashout at closing. The remaining funds from his reverse
PAGE 8
mortgage ($93,500) could be accessed next year without restriction using the built-in line of credit feature
of his loan.
By using this option with his new HECM, the client’s Initial Mortgage Insurance Premium was $1,775,
or 0.50 percent of his home’s appraised value. If he
had a larger existing mortgage balance that had to be
paid off, or additional Mandatory Obligations that required him to access more than 60 percent of his available Principal Limit, his Initial Mortgage I Premium
would have gone up to $8,875, or 2.50 percent of his
home’s appraised value. With larger initial disbursements, FHA charges more for the mortgage insurance
to cover the additional risk.
Addressing the Non-Borrowing Spouse
(NBS) Homestead Rights
In the past, some homeowners would choose to remove a younger spouse from the title of their home
in order to qualify for a HECM reverse mortgage.
Since a person needs to be at least sixty-two years old
to qualify for a HECM, a spouse who was sixty-one
years old or younger could elect to be removed from
the title, in order to obtain the reverse mortgage in
the qualified spouse’s name only. This can be problematic because if the older spouse who is covered by
the HECM dies before the non-borrowing spouse
(NBS), the NBS would be forced to refinance or sell
the home within six to twelve months of the death of
the HECM-covered spouse. Obviously, this could put
many NBS in harm’s way. This particular issue became
a hot button in the national media and needed to be
addressed by FHA.
The Solution. On August 4, 2014, FHA issued a
new Mortgagee Letter that allowed for new HECM
loans to protect the younger non-borrowing spouse by
giving new Principal Limit factors for borrowers using the NBS option. Now a HECM loan with a NBS
can still be funded, and both the borrowing spouse and
the NBS can live in that home for the rest of their
lives without being required to make monthly mortgage payments. Technically, a ninety-year-old borrower with an eighteen-year-old spouse could take out
a HECM reverse mortgage and both will be protected
from making monthly mortgage payments as long as
at least one of them still lives in that home.
There is a catch! The Principal Limits can be greatly reduced to offset the risk that FHA is assuming. For
example, a sixty-five-year old can access 54.2 percent
of the value of the home with a HECM. If that same
person had a fifty-one-year-old spouse, they would be
limited to accessing only 46 percent of the value of
their home, up to the maximum home value allowed
by FHA, which is $625,500. In the case of the ninety-year-old with the eighteen-year-old spouse, they’re
limited to accessing only 31.7 percent of the equity in
their home.
Implementing a Financial Assessment
Going back to the study performed by Stephanie
Moulton and her team at Ohio State University, they
found that utilizing credit criteria as part of a financial
assessment of potential HECM borrowers can reduce
the probability of future defaults. They showed that
adding a minimum FICO credit score of 500 is predicted to reduce HECM defaults by about 12 percent,
while a minimum FICO score of 580 is associated
with a nearly 40 percent decrease in the current default rate. Credit Scores in the 500-580 are considered
to be very low. The median personal credit score in the
U.S. is nearly 720.
To summarize the findings of the Moulton report,
it showed that by limiting the initial disbursements in
the first year of a HECM, implementing a basic credit
score requirement, monitoring the property tax to income ratios, and factoring in the borrower’s previous
mortgage payment and property tax payment history,
future HECM borrower defaults are expected to reduce significantly.
The Solution. After several delays, FHA will roll out
their Financial Assessment policies by April 27, 2015.
Once the Financial Assessment piece is in place,
there could be a dramatic change in the perception of
reverse mortgages. With so many safety improvements
made to the reverse mortgage program, it will become
more appealing to retired and retiring Americans in
the coming years. Having protection for the non-borrowing spouse and preserving more home equity for
people who want to age in place, will only strengthen
the perception of this important loan program. By performing a credit and income qualification process for
HECM borrowers to make sure they can afford to, and
demonstrate a willingness to, pay their property taxes
and other related property charges, the reverse mortgage program will be a much more attractive option
for older adults today and in the future. •CSA
Mark Eshelman, CSA, has been a Loan Officer for
over eighteen years and is a Reverse Mortgage
Lending Officer at Banner Bank in Vancouver,
Washington. He has a bachelor’s degree from
Concordia University in Portland, Oregon, and he serves on the
Housing Committee for the Clark County Commission on Aging.
Contact him at MEshelman@bannerbank.com.
■ RESOURCES
Bell, Marty and Stephanie Moulton. 2014. “The Right Fix: OSU
Default Analysis Shows HECM Heading in Right Direction.” Reverse
Mortgage Magazine, July-August 2014.
Center of Retirement Research at Boston College. 2014. “Using Your
House for Income in Retirement.” September 2014. http://crr.
bc.edu/special-projects/books/using-your-house-for-income-inretirement.
HUD.GOV. U.S. Department of Housing and Urban Development.
2015. “FHA Reverse Mortgages (HCMs) for Seniors.” March 27,
2015. http://portal.hud.gov/hudportal/HUD?src=/program_
offices/housing/sfh/hecm/hecmabou.
Sacks, Barry H., Ph.D., and Stephen R. Sacks, Ph.D. 2012.
“Reversing the Conventional Wisdom: Using Home Equity to
Supplement Retirement Income.” Journal of Financial Planning.
Feb. 2012.
Salter, John, CFP, Shaun Pfeiffer, and Harold Evensky, CFP. 2012.
“Standby Reverse Mortgages: A Risk Management Tool for
Retirement Distributions.” Journal of Financial Planning.
August 2012.
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