Reverse Mortgages Could Get More Risky for Spouses
Sometimes, a reverse mortgage that one spouse takes out to ease a couple’s retirement finances ends up causing the other spouse headaches and heartache when the borrowing spouse passes away. This danger could increase if a new HUD budget proposal passes. What's more, if you take out a reverse mortgage after October 2, 2017, your premiums will be higher than under current rules.
To understand the risk, start by knowing how these mortgages have worked up till now. The federally insured home equity conversion mortgage (HECM), which represents the vast majority of reverse mortgages, allows homeowners who are 62 and older to access their home equity as a lump sum, line of credit, series of regular payments or some combination of these. Unlike other loans, there are no income or credit score qualifications and no loan payments. The reverse mortgage is repaid when the borrower dies, either by heirs paying the lender roughly what the home is worth or by the lender foreclosing on the home and selling it. (For a quick overview of the basics, see Reverse Mortgage).
How Reverse Mortgages Have Been Dangerous for Surviving Spouses
Surviving wives and husbands whose deceased spouses took out a reverse mortgage with a case number assigned before August 4, 2014, were getting foreclosed on if they weren’t listed as borrowers on the mortgage. The reason they weren’t official borrowers might be because they didn’t meet the age minimum of 62 or because the couple would qualify to borrow more by putting only the older spouse on the loan.
Reverse mortgage guidelines said the loan had to be repaid in full when the borrower died. If the surviving spouse didn’t have the cash to repay the loan, then the lender had to take the house and sell it to get the money. This meant that the grieving widow or widower suffered two major upheavals in a short span.
To deal with this problem, the U.S. Department of Housing and Urban Development (HUD) subsequently changed the policy for reverse mortgages with case numbers assigned on or after August 4, 2014. The case number, assigned by the Federal Housing Administration (FHA), is usually close but not identical to the date the homeowner fills out the reverse mortgage application. For these newer loans, proceeds had to be based on the younger spouse’s age, even if that spouse wasn’t old enough to be on the loan.
With smaller loan amounts in these cases, lenders faced less risk. Eligible non-borrowing spouses were formally documented and protected against foreclosure as long as they met the basic reverse mortgage requirements: staying current on property taxes and homeowners insurance, occupying the home as a primary residence, and keeping the home in good repair.
What's more, in June 2015, HUD told reverse mortgage lenders that they didn’t have to demand immediate repayment upon the borrowing spouse’s death; they could instead transfer the reverse mortgage to the department and file a claim to be reimbursed for what the house was worth. The surviving spouse, whose name was on the home’s deed, could then stay in the house for as long as he or she continued to meet the basic reverse mortgage requirements. However, lenders for borrowers with case numbers before August 4, 2014, aren’t required to make this concession; they can still demand repayment or foreclose. (For more background, see Reverse Mortgage: Could Your Widow(er) Lose the House?)
Regardless of when the loan was taken out, surviving, non-borrowing spouses can’t receive any further reverse mortgage proceeds after the borrowing spouse’s death, which means keeping up with tax, insurance and maintenance requirements could be difficult or impossible if the surviving spouse has few other assets or little income.
New Rules: Surviving Spouses at Risk Again
The latest development in the surviving-spouse saga comes from the Trump administration’s proposed budget request for HUD, which oversees the reverse mortgage program. A small wording change in the document could put surviving spouses at risk of losing their homes once again if the budget request is passed as is. It’s unclear whether the wording change was intentional or accidental, but the outcome for some seniors could be poor either way unless the wording is changed.
As reported by the New York Times, the troubling language states that a reverse mortgage lender “shall not include the successors and assigns of the original borrower under a mortgage,” which implies that a surviving spouse may not have the right to stay in the home. The Times notes that the proposal also “includes a new line that would give the secretary of HUD wide discretion to determine when a loan is payable after the death of the borrower.”
Change #2: Higher Premiums, Smaller Loans
One big change for reverse mortgages is certain: Mortgage insurance premiums will rise, starting with loans whose case numbers are assigned on or after October 2, 2017. What's more, the amount you can borrow will drop. Here's why.
When lenders lose money on reverse mortgages, the FHA reimburses them. Mortgage insurance premiums are what fund those reimbursements and facilitate the program. (Without the government guarantee, private lenders might not be keen to take the risk of issuing reverse mortgages.) However, in recent years the reverse mortgage program has become financially unstable because it has lost so much money on its guarantees.
Right now, most borrowers pay a premium of 0.5% of the home’s value when they take out the loan and 1.25% of the loan balance annually for the life of the loan. Under the new rules, most borrowers will pay an up-front premium of 2.0% and an ongoing premium of 0.5% annually. The exception: Borrowers who currently take a large lump sum pay 2.5% up front; those who take this route starting in October will have slightly lower up-front premiums.
The amount a homeowner can borrow with a reverse mortgage depends on the youngest borrower’s age (the younger you are, the less you can borrow); the home’s value (the more it’s worth, the more you can borrow); and interest rates (the lower the rate, the more you can borrow). On average, today’s borrowers can get 64% of their home’s value with a reverse mortgage. With the premium change, that amount will decrease to 58%.
The Bottom Line
The upcoming changes in reverse mortgage premiums are supposed to make the program more financially stable. One big question is whether fewer seniors will want reverse mortgages when they can borrow less. Another is how many fewer seniors with existing mortgage balances will qualify for reverse mortgages, which are only available to seniors who own their homes outright or have a small enough balance that the reverse mortgage proceeds will repay it entirely. And finally, there is the question of whether the government will change the current language in the budget proposal to protect surviving spouses who are not official borrowers on their home’s reverse mortgage.