Every day, approximately 10,000 people in the United States turn age 62, according to the Census Bureau. And if they are homeowners, they may be eligible to borrow against a portion of the equity in their house by using a loan called a “reverse mortgage.” Unlike a traditional mortgage, for which the borrower makes payments to the lender, with a reverse mortgage the lender pays the borrower the money requested and does not expect to be repaid until after the borrower no longer lives in the home. But as FDIC Counsel Richard Schwartz noted, “While a reverse mortgage can be used to supplement monthly income, obtain lump-sum cash or otherwise help a senior citizen ‘age in place,’ some borrowers may face unintended obstacles and consequences, especially if they no longer have the ability to pay taxes or property insurance.”
FDIC Consumer News last reported on reverse mortgages in our Summer 2013 issue. Here is an update with a couple of new developments.
New rules from HUD add protections for certain surviving spouses after the death of a reverse mortgage borrower. The most popular reverse mortgage program is the Home Equity Conversion Mortgage (HECM), which is insured by the U.S. Department of Housing and Urban Development (HUD). Until recently, if the non-borrowing spouse was not on the loan, he or she was not entitled to remain in the property following the death of the borrower. But under HUD’s new rules, a non-borrowing, surviving spouse can remain in the home if specific conditions are met. These changes apply to reverse mortgage loans in which the borrowing spouse applied for a reverse mortgage before August 2014. In addition, the couple must have resided in the property as their principal residence throughout the duration of the HECM, and taxes, property insurance and any other special assessments that may be required by local or state law must have been paid.
The concern regarding non-borrowing spouses has been the source of many reverse mortgage issues. Here’s why: The amount of money a reverse mortgage borrower can draw is based in part on the age of the youngest borrower — and unless all borrowers are 62 or over, they would not qualify for a reverse mortgage.
“Many borrowers who opted to exclude the younger spouse from the loan in order to qualify for a HECM did so with the hope that when the younger occupant became 62 they could refinance and add the spouse,” said Andrea Riche, an FDIC program manager who oversees reverse mortgage issues. “But when home prices nationwide dropped in 2007 and 2008, the possibility of refinancing into another HECM was eliminated. And if the borrowing spouse passed away, HUD or the private lender became entitled to take possession of the home and the surviving spouse was almost always evicted. But now, HUD provides a mechanism for an eligible non-borrowing spouse to stay in the home.”
The Consumer Financial Protection Bureau (CFPB) is warning consumers about potentially misleading reverse mortgage advertising. In June 2015, the CFPB issued a consumer advisory saying that many television, radio, print and Internet advertisements for reverse mortgages had “incomplete and inaccurate statements used to describe the loans. In addition, most of the important loan requirements were often buried in fine print if they were even mentioned at all. These advertisements may leave older homeowners with the false impression that reverse mortgage loans are a risk-free solution to financial gaps in retirement.”
For example, the CFPB said, “After looking at a variety of ads, many homeowners we spoke to didn’t realize reverse mortgage loans need to be repaid.” To learn more and for tips, such as the value of developing a financial plan, go to the CFPB website.
Before you decide to get a reverse mortgage of any kind, talk to a qualified professional. You can find HUD-approved HECM Counseling Agencies near you by accessing this HUD webpage or calling 1-800-569-4287. The Federal Trade Commission also has a website on determining whether a reverse mortgage is a good product for you and links to additional information.