With the reverse mortgage Financial Assessment now in effect, business and finance writers around the country are shining a spotlight on what the new underwriting requirements mean for potential reverse mortgage borrowers and the industry itself.
One way to think about the FA is that it makes reverse mortgages more similar to forward mortgages—and that it could push potentially risky borrowers into home sales rather than reverse mortgages, senior CBS News business analyst Jill Schlesinger wrote in Wednesday’s Chicago Tribune.
Describing the Financial Assessment as a “big change for the reverse mortgage market,” Schlesinger summarized the new steps that prospective borrowers now have to go through, following the FA taking effect on April 27. These steps include producing documentation such as tax returns and pay stubs, providing proof that real estate taxes have been paid, and undergoing an analysis of monthly income and cash flow.
The “life expectancy set-aside” that now might be required of some reverse mortgage borrowers is similar to an escrow account used for a conventional mortgage, through which property taxes and homeowner’s insurance is paid, she wrote.
“Fans of reverse mortgages note that the new rules preserve the ultimate benefit of the transaction: Borrowers can still receive a monthly check for life or get a line of credit insured to grow for as long as they live in the home,” Schlesinger pointed out.
The other side of the coin is that consumers with shaky credit or low income now could find it harder to obtain a reverse mortgage. This might have the positive effect that the government hopes to achieve through the FA: fewer defaults of unqualified borrowers. Regulators have said that if these people need to transform their home equity into cash to live on, they might be “better off” if they sell their homes and downsize or rent, Schlesinger wrote.
During the Great Recession, reverse mortgages enabled people to tap into home equity to finance retirement without having to sell in an environment of plunging property values, Schlesinger emphasized, without explicitly stating that the FA might put some people in the position of selling their homes in undesirable market conditions.
Read the entire Jill on Money column here.
Written by Tim Mullaney