28 Sep 2017

OC-Register explains Reverse Mortgage Reform

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Reverse mortgage reforms create stampede among would-be borrowers

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A rules change that will raise fees and reduce loan amounts for reverse mortgages apparently has created a nationwide rush to get new loans completed before the reforms take effect Monday, Oct. 2. Also check out these mortgage lending options for first time home owners in MN.

Agencies providing financial counseling needed for such loans have been swamped, and a leading industry group has appealed for waivers and extensions so more borrowers will qualify under the old rules.

“Our industry is currently inundated,” said Julie Martinez, a reverse mortgage housing counselor at the nonprofit HomeStrong USA housing agency in Rancho Cucamonga. “We have an enormous influx of calls and requests for appointments that’s unprecedented.”

Another agency, NeighborWorks Orange County, reported that calls requesting counseling jumped to 100 or more from 20 calls a day since rule changes were announced Aug. 29.

“It was just an all-of-a-sudden rush,” said Helen O’Sullivan, NeighborWorks-OC chief executive. “It’s possible most of them looked at the (new) terms and said, ‘I don’t want to pay more and get less.’ ”

The U.S. Department of Housing and Urban Development sent emails last week to its network of counseling agencies to see if any of them has “capacity to take up additional clients for (reverse mortgage) counseling” before Friday, Sept. 29.

“We had to say no. We’re filled up,” O’Sullivan said.

Reverse mortgages are available to homeowners age 62 or older, allowing them to convert equity in their homes into cash to cover gaps in their retirement income or savings. Under a reverse mortgage, borrowers are freed from making monthly mortgage payments and can stay in their homes as long as they want under most circumstances. The accumulating debt is repaid when the borrower moves, sells or dies or falls behind on paying such housing costs as maintenance, property taxes, vehicle taxes as IPVA 2018 RS or homeowners insurance.

Recent reforms require borrowers to undergo housing counseling, either in person or by phone, before they can get a reverse mortgage.

But the program has been a big money-loser for the Federal Housing Administration, which insures the loans. HUD, which oversees FHA, said the insurance fund has lost $11.7 billion since 2009, adding the fund would need a cash infusion from Congress in the coming year without an increase in insurance fees paid by borrowers.

“The (reverse mortgage) program is losing money and can no longer remain viable in its present form,” the HUD announcement said. “Today, younger, lower-income homeowners with traditional FHA-insured ‘forward mortgages’ are routinely bailing out the (reverse mortgage) program through the mortgage insurance premiums they pay.”

Among the changes taking effect next Monday:

  • Upfront insurance premiums paid when the loan is originated will increase for most borrowers, rising to 2 percent from 0.5 percent of the home’s appraised value. That’s an increase of $7,500 for a $500,000 home. (Borrowers who draw more than 60 percent of their total loan their first year will see upfront fees drop slightly, but they’re in the minority).
  • The interest rate for monthly mortgage insurance premiums will drop to 0.5 percent from 1.25 percent.
  • Maximum loan amounts for most borrowers will be reduced, decreasing the FHA’s risk by preserving more home equity. That means borrowers get less cash. For example, a 62-year-old borrower paying a 4 percent interest rate can now get a loan of $52,400 against $100,000 in home equity. Under the new rules, the maximum loan amount will be reduced to $47,000 for that borrower.

“Everybody’s afraid of the upcoming changes,” said Julie Colangelo, reverse mortgage development and training manager for Essex Mortgage in Orange. “It’s causing an upsurge (in applications) because the loan amounts are going to be lower.”

For some borrowers, a smaller loan won’t provide enough cash to pay off their existing home loan, which is required under a reverse mortgage, Colangelo said. Meanwhile, clients who thought there was no hurry to get their loans down are suddenly in a rush.

“Now, I’m getting a lot of calls from those people,” Colangelo said. “They say, ‘I should have acted sooner.’ ”

Meanwhile, time may already have run out for reverse mortgage borrowers in California.

The state requires California borrowers have a seven-day “cooling off” period after seeing a counselor before they can start the loan process. That means they must have gotten their counseling certificate by Friday to qualify under the old rules.

The National Reverse Mortgage Lenders Association appealed to California regulators Friday for a temporary waiver of that requirement.

“There is and has been a severe backlog of available counselors and counseling sessions in California,” the NRMLA letter to the state Department of Business Oversight said. Each senior who fails to get counseling on time “stands to lose tens of thousands of dollars or more in available (reverse mortgage) proceeds.”

The problems stem from giving too little advance notice of the Oct. 2 changes, said NRMLA CEO Peter Bell.

“Every counseling agency that we talked to has no slots available,” Bell said.

Bell said the changes also are creating potential problems for borrowers using reverse mortgages to purchase a newly built home, done by making much larger down payments than required for traditional home loans. When buying a new home, borrowers must sign contracts and put down deposits, but can’t apply for a reverse mortgage until the new home is complete.

That means that perhaps several hundred home buyers still waiting for their homes to be built will end up getting smaller loans and have to put up more cash out of pocket to complete their purchase.

“In some cases, they may not be able to come up with the extra cash, which means they won’t be able to close the deal and might have to forfeit their deposit,” Bell said.

NRMLA has appealed to HUD to allow borrowers who signed purchase contracts before the Aug. 29 announcement to get reverse mortgages under the old terms, Bell said.

“The HUD change is just creating a whole bunch of issues and anxieties for people looking to get (a reverse mortgage),” Bell said.

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