Changes com­ing to re­verse mort­gages

Los Angeles Times - - MARKETPLACE - By Ken­neth R. Har­ney ken­har­ney@earth­ Dis­trib­uted by Wash­ing­ton Post Writ­ers Group.

WASH­ING­TON — In­ter­ested in a re­verse mort­gage with­out a lot of has­sles? Bet­ter get your ap­pli­ca­tion in fast. As of April 27, the fed­eral gov­ern­ment is im­pos­ing a se­ries of ex­ten­sive “fi­nan­cial as­sess­ment” tests that will make ap­ply­ing for a re­verse mort­gage tougher — much like ap­ply­ing for a stan­dard home mort­gage.

Re­verse mort­gages al­ways have been dif­fer­ent: They’re avail­able only to those 62 and older who have eq­uity in their homes that they want to con­vert into cash. There are no re­pay­ments re­quired un­til the bor­rower sells the house, moves out or dies. Loan re­cip­i­ents’ main re­spon­si­bil­i­ties are to keep cur­rent on lo­cal prop­erty taxes, pay haz­ard in­sur­ance pre­mi­ums and keep the place in rea­son­able con­di­tion.

The Fed­eral Hous­ing Ad­min­is­tra­tion has run the dom­i­nant in­sured re­verse mort­gage pro­gram in the coun­try for three decades and has been rel­a­tively easy­go­ing when it comes to un­der­writ­ing. If you qual­i­fied on age and eq­uity, you’ve pretty much had a good shot at get­ting a loan.

But dur­ing the re­ces­sion and mort­gage bust years, thou­sands of bor­row­ers fell into de­fault be­cause they didn’t pay their re­quired prop­erty taxes and haz­ard in­sur­ance pre­mi­ums. On top of that, real es­tate val­ues plunged, pro­duc­ing huge losses on de­faulted and fore­closed prop­er­ties for the FHA. The losses got so se­vere that the Trea­sury Depart­ment had to pro­vide the FHA with a $1.7-bil­lion bailout in 2013, the first since the agency was cre­ated in the 1930s.

All of this led to the dra­matic changes com­ing April 27. Ap­pli­cants are now go­ing to need to demon­strate up­front that they have both the will­ing­ness and the ca­pac­ity to meet their obligations. Re­verse mort­gage lenders are go­ing to pull bor­row­ers’ credit re­ports from the na­tional credit bu­reaus, just as they do with other mort­gages.

Ap­pli­cants are go­ing to have to show that they paid their real es­tate taxes, home­owner as­so­ci­a­tion fees and other prop­erty-re­lated charges on time for at least the last 24 months. They will be asked to pro­duce doc­u­men­ta­tion of their em­ploy­ment sta­tus (if they’re still work­ing), in­come and fi­nan­cial as­sets, as well as un­dergo a “resid­ual in­come” anal­y­sis that ex­am­ines all their monthly ex­penses and cash f low.

If they get in­ad­e­quate marks on th­ese tests, they may be re­quired to cre­ate a “life ex­pectancy set-aside” — es­sen­tially a re­serve ac­count or es­crow funded wholly or in part from their loan pro­ceeds. For some bor­row­ers, the set-asides may be so sub­stan­tial they’ll be left with min­i­mal cash at closing, mak­ing the en­tire re­verse mort­gage process a waste of ef­fort.

The changes, say re­verse mort­gage in­dus­try ex­perts, will ex­clude po­ten­tially thou­sands of older home­own­ers from ob­tain­ing a re­verse mort­gage, es­pe­cially those who are on the mar­gins eco­nom­i­cally and need the cash to help pay for on­go­ing house­hold ex­penses.

Reza Ja­hangiri, chief ex­ec­u­tive of Amer­i­can Ad­vi­sors Group, the high­est-vol­ume re­verse mort­gage lender, said his com­pany ex­pects a decline in loan ac­tiv­ity of 8% to 10% af­ter the fi­nan­cial as­sess­ment rules take ef­fect. He also ex­pects a coun­ter­vail­ing shift to­ward “main­stream” bor­row­ers who seek to use a re­verse mort­gage as part of their re­tire­ment fi­nan­cial plan­ning, in­clud­ing rais­ing money to pur­chase a new house or to es­tab­lish a flex­i­ble line of credit they can draw from as needed.

Many older Amer­i­cans cur­rently can’t qual­ify for bank home-eq­uity credit lines, he said, but with ad­e­quate credit, in­come and as­sets, can qual­ify for a re­verse mort­gage in the form of a credit line.

Maggie O’Con­nell, who orig­i­nates FHA-in­sured re­verse mort­gages for the Fed­eral Sav­ings Bank from of­fices in Reno and Danville, Calif., says she’s been scram­bling “to get peo­ple in be­fore the dead­line” who might en­counter dif­fi­culty — or be turned off by all the re­quired doc­u­men­ta­tion — un­der the new rules.

Although she may do fewer loans in the short term, O’Con­nell said, in the long term the tougher rules “are prob­a­bly all in all a good thing” be­cause they will pre­vent fi­nan­cially weak bor­row­ers from tak­ing out loans they can’t han­dle and that will even­tu­ally end up in de­fault, “which is bad for them and bad for us.”

Bot­tom line: Tougher credit stan­dards have come to re­verse mort­gages — fi­nally. Be­fore ap­ply­ing, be aware of the types of doc­u­men­ta­tion you’ll need. And when you talk with a lender or fi­nan­cial coun­selor about a re­verse loan, make sure you in­volve the en­tire fam­ily, so every­body knows what you are get­ting into.

Martin Prescott Getty Images

OLDER HOME­OWN­ERS should talk to a fi­nan­cial coun­selor about whether to take out a re­verse mort­gage as part of their re­tire­ment fi­nan­cial plan­ning.

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