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Consumer
New reverse mortgage rules have downside
NEW YORK (3/23/11)--Consumers considering a reverse mortgage better know the ins and outs of the product and its providers. Reverse mortgages are meant to provide cash-strapped consumers with a tool to draw upon some of a home’s appreciated value. But with 23% of all homes underwater (owing more than the value of the property), and rules that require surviving spouses to pay the full loan balance to keep the home, the product is drawing renewed criticism (The New York Times March 3). AARP filed a lawsuit against the Housing and Urban Development Department (HUD) on March 11. HUD’s rules, AARP contends, are requiring newly widowed people to pay off their loan balances quickly or face foreclosure (AARP.org March 8). This is happening to a small group of people who did not have their names, as well as that of the deceased spouse, on the reverse mortgage documents. HUD rules since 1989 have stated that a borrower or heirs would never owe more than the home was worth at the time of repayment. But HUD “clarified” its policy--AARP says it changed the policy--at the end of 2008 to say an heir must pay the full mortgage balance to keep the home. About 78,000 reverse mortgages were issued in 2010; roughly 660,000 have been issued over the past 20 years. The product’s popularity seemed to be growing, with about three quarters of these loans issued in the past five years. Reverse mortgages still represent 1% of the mortgage market, with the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program making up more than 90% of all reverse mortgages. High fees and a few shady providers have given this consumer financial tool a black eye in some quarters. A standard HECM loan charges a 2% mortgage insurance premium (MIP) up front on a home’s value (not on the amount borrowed, as with regular mortgages). Additionally, some sketchy providers lured users to take out reverse mortgages and invest the proceeds into questionable annuity products. In answer to complaints about fees and to increase the volume of low-risk loans as a percentage of the insurance pool, a new HECM Saver Loan appeared last fall that basically eliminates the hefty MIP, although the loan carries a higher interest rate and has lower loan ceilings. Here are some things to consider if you’re thinking about a reverse mortgage:
* Consider whether there is another, less costly alternative to a reverse mortgage. You want to consider using this tool as a last resort for cash. * Calculate whether you can afford such a loan. Setup costs can be high, so you effectively pay more if you have to move within a few years of making the loan agreement. * Make sure both spouses are on the reverse mortgage. It’s not a guarantee against a problem, but it won’t hurt. (If your spouse is younger than 62, that makes you ineligible, as a pair, for the reverse mortgage.) * Talk to an independent consultant, perhaps an elder-law attorney, who knows these products and is not selling them. * Make sure you understand how these loans work.
The Dodd-Frank Act requires the new Consumer Financial Protection Bureau to study reverse mortgages for unfair and deceptive or abusive practices.
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