October 3rd, 2013
New changes are in store for reverse mortgages, as the Federal Housing Administration plans to tighten the restrictions on those who can get cash from their home value.
Homeowners who are 62 and older are eligible for reverse mortgages and can receive payment from the FHA against the value of their home as either a lump sum or monthly payments. The program is only available to those who have paid off their mortgage or had a large down payment on their property.
Currently, the FHA’s program, called the Home Equity Conversion Mortgage (HECM) program, costs too much to sustain its liberal regulations and policies. Reverse mortgages have typically been a source of income for many seniors, but the changes are intended to strengthen the economy overall. According to Reuters, the FHA estimates it will spend $2.8 billion in reverse mortgage backings this fiscal year. The new changes will cut down those who can borrow by 22 percent. Fees will also be higher, the amount that can be borrowed will be lessened and the vetting process for applicants will become more vigorous in an effort to decrease the cost of the program.
More homeowners opted for a reverse mortgage during the recession and ended up asking for the lump sum payment, The New York Times reported. The result of this trend put a major strain on the program’s funds.
“It was originally intended for those borrowers considered house-rich and cash-poor,” Stephanie Moulton, a counselor with AARP and assistant professor at Ohio State University, told Reuters. “But now it is increasingly used as a tool for seniors tapping equity lines for broader retirement packages.”
The FHA changes in the program should encourage participants to borrow less against their home equity. When home prices dropped, lenders were unable to regain the full amount after a property sold. The tighter regulation will also allow more homeowners to borrow more steadily and ensure they are able to stay in their homes, instead of taking large lump sums.
“The changes really put the product on track as a long-term financial planning tool as opposed to a crisis management tool,” Ramsey Alwin, senior director of economic security at the National Council on Aging, told The New York Times.
For borrowers, the new changes will still enable most to get a reverse mortgage if they qualify. With less risk under more restrictions, the changes will have a positive impact on lending overall and the health of the housing market.