Will Program Changes Make Reverse Mortgages More Attractive?

Changes to the Federal Housing Administration-insured reverse mortgage program should be viewed as positive, and will ultimately make the program more attractive to retirees, write Boston College researchers in a recent brief.

Recapping past program details and changes made to Home Equity Conversion Mortgage Rules implemented this fall, researchers Alicia Munnell and Stephen Sass find the changes will protect borrowers and the federal government while providing a better customer experience overall.

“Accessing home equity will become increasingly important in a world where retirement needs are expanding,” Munnell and Sass of Boston College’s Center for Retirement Research write, “people are living longer and face rapidly rising health care costs—and the retirement system is contracting—Social Security replacement rates are declining and employer-provided pensions have shifted from defined benefit plans to 401(k)s where balances are modest.”

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Tapping home equity through a reverse mortgage is one way retirees will be able to offset the rising challenges they are facing, according to the brief.

Three changes made to the HECM program at the end of 2013 serve to improve appeal of the loans, the researchers conclude, including the merge of the former Saver and Standard loan programs; restricted upfront draws on lump sum loans; and forthcoming underwriting that will determine whether a borrower can continue to meet ongoing loan charges such as property tax and insurance.

“All these changes should be viewed as positive,” say Munnell and Sass. “Consolidating the Standard and Saver will make the program easier to understand. The lower maximum loan amounts and the limit on first-year withdrawals will take pressure off the insurance fund by reducing the likelihood that borrowers default. The financial assessment will ensure that the people taking out a reverse mortgage will not lose their homes by failing to pay taxes and insurance.”

Ultimately, the improved experience of borrowers should drive demand for the loans, they say.

“A better customer experience combined with lower fees will also make reverse mortgages a more attractive option for retirees.”

View the research brief.

Written by Elizabeth Ecker

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  • The BCCRR has once again shown its propensity to conclusions based on shallow research.

    For example, the article points to actual HECM terminations as the pressure placed on the MMI Fund rather than actuarial projections of the losses coming from future terminations and that effect on the MMI Fund. You would think that a document coming from a recognized university would have been more thoroughly researched resulting in more plausible answers.

    Now we come back to “more retirement income.” What income? HECMs provide cash not income to borrowers unless the borrower does not have to pay back a part of the loan. “The loan must be repaid only when the borrower moves or dies.” What about a sale leaseback situation? Does the BCCRR believe that a sale which leaves the borrowers in the home but not on title will not result in the loan becoming due and payable?

    Since when do assessed values come into play with a HECM? Assessed values are determined by government assessors, while private appraisers provide the appraised values relied upon throughout the origination process. Then we see the age of the borrower being presented as a factor in the determination of the PLF rather than the age of the youngest borrower. The authors do not seem to understand the difference between the expected interest rate and the note rate when they say: “Interest rate, the lower the interest rate, the more slowly the outstanding balance will increase, so the larger the available amount as a proportion of the value of the house.” Fixed rate HECMs are not the only HECMs.

    In describing the growth of originations only the rise in the value of homes is credited. Yet TV advertising greately contributed to the rise in originations. Also the recent rise in home values has done little to increase recent originations.

    Then we read: “Fixed-rate HECM mortgages became the norm…with borrowers typically taking out the maximum amount available…during 2010-2012.” Do the authors understand what a closed end mortgage is? I will stop here with analyzing the historical misconceptions and errors.

    How one can conclude that HECMs are better for borrowers just because of financial assessment, reduced PLFs, a first year disbursement limitation, and the soon to be added LESA set asides is an interesting view. It certainly means the loans are far less flexible for many in the first year, does not prevent full draws by the article acclaimed riskiest borrowers with sufficient mandatory obligations, and is untested as to the value of financial assessment or LESAs.

    How closely the new HECM resembles the Saver can be more reasonably measured by looking at proceeds available to borrowers which is the principal limit minus all origination, initial MIP, and other closing costs. So comparing the initial MIP of the new HECM to the initial MIP of a Standard is a very biased comparison.

    Is the new HECM more attractive to borrowers and better for them? Borrowers are already giving us those answers and they are not what BCCRR is telling us.

  • Combining the standard and saver certainly didn’t make RMs easier to understand. Who are they kidding? For instance, now you’ve got first year draw limitations to explain and why they can’t access some of the principal limit on a fixed. And safer for the consumer? It what ways? The changes were clearly to help protect FHA’s insurance pool and ensure the federal backing will continue IMHO.

  • Sure, for those who can still get a reverse mortgage, the new rules make everything safer. But for the seniors who really need to capture the equity in their home, many will find they are turned away for lack of sufficient equity.

  • >>“A better customer experience combined with lower fees will also make reverse mortgages a more attractive option for retirees.”

    Lower fees? I used to be able to pay 100% of all fees, including the appraisal, prior to October 1st. Now I can’t pay any. How is that a “better customer experience?” How is it a “more attractive options for retirees?”

    Talk to my past clients, and they wouldn’t agree with those statements.

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