Reverse Mortgage Changes Present New Hurdles, Safety Measures: Kiplinger

New changes to the Department of Housing and Urban Development’s reverse mortgage program are presenting new hurdles to qualify, but should ultimately strengthen the Federal Housing Administration’s insurance fund, writes a Kiplinger article this week that includes input from industry participants as well as AARP and financial advisor Michael Kitces.

Kiplinger explains the distinction between the old reverse mortgage product and the new one, as of October 1, that offers less of an upfront draw and two different mortgage insurance premiums based on the upfront amount. Borrowers will receive about 15% less as a result, Kiplinger writes.

“The changes were made to ensure the program is open for business tomorrow,” One Reverse Mortgage CEO Gregg Smith told the publication, which cited a recent $1.7 billion treasury draw made by FHA in order to shore up its insurance fund as a reason for the changes. 

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Forthcoming changes including the introduction of a financial assessment and mandatory set asides for some borrowers that will hold funds to pay for property tax and insurance will add an additional hurdle, Kiplinger writes. 

“Because the set-aside may need to last for 20 years or more, the amount could be very large. For some, the proceeds may end up paying only loan expenses, taxes and insurance—but covering those costs could enable the senior to stay in the home,” Kiplinger writes based on input from Kitces. “And it would free up cash in a retiree’s budget to pay for other expenses.”

Some interested borrowers will be denied the loan as an option because they won’t pass the financial assessment, AARP’s Lori Trawinski told Kiplinger. 

And while affluent borrowers will likely pass that assessment, the elimination of the Saver could be seen as a deterrent for those who are looking to use a reverse mortgage to extend the life of their investment portfolio, Kitces says.  

“Spending a few more thousand dollars upfront isn’t a deal killer, but it takes a little value off the strategy,” he says.

View the original Kiplinger article.

Written by Elizabeth Ecker

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  • Here is an interesting misstatement: “However, some seniors may get hit with a higher 2.5% upfront premium if they take more than 60% of the proceeds during the loan’s first year.” The author misses the point that if the mandatory obligations are not over 50% of the principal limit, then the borrower cannot obtain anymore than 60% until the year after funding.

    The following is an euphemistic way of stating that HUD took $1.7 billion out of the Treasury about four weeks ago but did notify Congress about its intention to do so: “HUD also has asked Congress for about $1.7 billion to shore up the fund.”

    Like so many others, even Rachel Sheedy, the columnist, shows how little she understands how the value of the HECM portion of the MMI Fund is determined: “As housing prices dropped, lenders often could not recoup the full amount of the loans when they came due.” This is a bunch of malarkey since the HECM portion of the MMI Fund is expected to once again have a positive cash flow this fiscal year.

    Here is another misstatement: “Some borrowers will be required to set aside part of the loan into an escrow account to pay future bills.”

    There are other interesting statements but by and large the article makes a generally good presentation about the changes.

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