The general strengthening that the Home Equity Conversion Mortgage (HECM) program has undergone over the past decade has helped to reform what was previously an entirely “sketchy” reputation among financial planners, and the strengthening of regulations and oversight has contributed to a loan product that could serve as a retirement investment tool for those in the right circumstances.
This is according to a new column at Kiplinger, according to outreach conducted to financial planners and counselors.
“[O]ver the past decade, the U.S. Department of Housing and Urban Development strengthened regulations to protect consumers,” the Kiplinger column reads. “HUD backs and oversees about 95% of reverse mortgages, and increasingly, some retirement experts believe these loans can be part of an overall investment strategy that lets people stay in their homes as they age.”
This is a perspective shared with Kiplinger by Jennifer Fraser, director of stakeholder engagement at GreenPath Financial Services.
“Like any financial product, reverse mortgages can be a great tool,” Fraser told the outlet. “They work well for some people and are not a great fit for others.”
Still, while reverse mortgages have certainly evolved in terms of the oversight they now have in comparison to a decade ago, certain pitfalls do exist, the column says.
“The agency now requires that borrowers receive counseling at HUD-approved sites before closing on a HECM and limits how much a borrower can draw at closing or in the loan’s first year,” the column reads. “HUD also mandates a financial assessment of the borrower’s sources of income, including Social Security, pensions and investments. The amount you can borrow depends on your age (with older homeowners typically receiving more) and your house value, the amount of equity in it and interest rates. Although other debts are considered, there is no debt-to-income ratio requirement.”
Still, there have been demonstrable improvements stemming from changes handed down by HUD and the Federal Housing Administration (FHA), the column notes, based on input from National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin.
“The number of reverse mortgage defaults have fallen to about 1.5% in 2019, compared with between 3.6% and 5% before 2014, says Irwin,” the column reads. “According to HUD, 49,207 HECMs were taken out in 2021.”
While other concerns are apparent from organizations like AARP and the Consumer Financial Protection Bureau (CFPB), the evolution of the reverse mortgage has helped to allay concerns while offering qualifying borrowers with additional financial options in retirement, Irwin told the outlet.
“[F]or the right person under the right circumstances, this is a safe and good option to consider for effectively aging in place,” he said.
Read the column at Kiplinger.