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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.”

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