The FHA has issued a 40-page mortgagee letter basically revamping the reverse mortgage program. The present Standard and Saver programs have been eliminated, a new program will be initiated on October 1, and there are many basic changes that will affect seniors of all demographics. They have also issued a second mortgagee letter (59 more pages), which also alters the HECM Program as we know it by initiating Financial Assessments effective January 2014.
I have spoken to a few professionals in the reverse mortgage field and have heard them express mixed feelings about the new program. I will attempt to explain both sides here, and you can make up your own mind.
One negative perspective on the changes is that some expect it will exclude the seniors who need the program the most. These seniors live on fixed incomes, carry debt and, in some cases, are still paying off a mortgage. The HECM program once helped alleviate their financial concerns by providing enough funds to pay off their existing mortgage and giving them additional cash to live on. This money prevented these seniors from having to move to an assisted living facility or a nursing home, allowing them to age in place. It kept them from utilizing entitlement programs that might be a burden on the government, and allowed them to access their hard-earned equity to support themselves.
These are the seniors who live from Social Security check to Social Security check. Month after month, they live for that check, and many times it’s not even enough to cover their monthly expenses. These are the seniors who have illnesses that Medicare can’t even cover. The stories go on and on. But under the new program, with Financial Assessment in place, many of these cash-strapped seniors will no longer qualify for a HECM loan.
While this critique of the new changes may be true, there are some positive developments that will come from the new program, and perhaps these positives will outweigh the fact that some seniors will no longer qualify for the loan.
Proponents of the new changes say this new HECM program will be better than the old. The new HECM rules will prevent borrowers from facing foreclosure by requiring set-asides for risky borrowers for real estate taxes and homeowner’s insurance, preventing many from defaulting on their obligations. And it will also benefit the FHA’s Mutual Mortgage Insurance Fund, which has been in the red for a few years now, therefore solidifying the program’s long-term sustainability.
Many reverse professionals also seem to agree that the new regulations will benefit affluent seniors by catering to those who would use a HECM as a financial planning tool rather than as a source for cash to pay day-to-day living expenses. Some financial planners are recognizing the potential in HECMs and are advising their clients to take out the reverse mortgage line of credit now, hold onto it for 15 to 20 years, watch the compounding interest it will accrue over that time, and take the money out when it’s needed. Some planners are also advising clients to delay accessing Social Security by taking out a reverse mortgage and living off the income it derives for five years. If seniors wait until 70 to apply for Social Security, their benefits will be significantly higher than they would be at 65.
As a recent article in The New York Times pointed out, HUD’s changes will effectively make the HECM a more attractive financial planning tool, and less viable for needs-based seniors looking for quick access to cash. Whether the industry can adjust to the new regulations may largely depend on how successful we will be in connecting with the financial planning community to promote the product.
