mortgage

Rebirth of the reverse mortgage?

What consumer protections have been put in place in the last few years in the realm of reverse mortgages?

The Department of Housing and Urban Development and FHA have primary responsibility for HECMs, and the new Consumer Financial Protection Bureau also weighs in. They are apparently issuing rules that aim to reduce the potential for conflicts of interest in loan origination -- for example, to reduce the possibility that originators might steer borrowers to higher-cost products to increase their fee income. There's prima facie evidence that this happened more often than we'd like with regular "forward mortgages" during the subprime run-up in the early 2000s.

Servicers are also subject to some CFPB regulation that aims to provide greater transparency and more effective dispute resolution.

Appraisals are a key element to any mortgage transaction. After Dodd-Frank, borrowers have to be given more information about these appraisals without additional charges.

There are numerous other regulations in place or being contemplated. The regulatory environment for all kinds of mortgages is devilishly complex at the moment.

How can a consumer distinguish the difference between a beneficial reverse mortgage and one that's not in the homeowner's best interests?

That question is really too complicated and dependent on an individual's situation to answer fully in a short article. But here are a few points to keep in mind:

First, HECMs are only available to those who meet certain qualifications. You have to be 62 or older, and you have to have sufficient equity in your home (no mortgage, or a small loan balance relative to the value of the property that can be paid off with some of the proceeds from the HECM).

Second, with a regular mortgage -- first or second lien, home equity line of credit, etc. -- the borrower has to plan to pay the loan back, and both they and the lender (we hope!) require a sufficient financial cushion to repay and avoid default. With an HECM or other reverse mortgage, you are not paying the loan back out of your regular income because it will come out of your house equity. However, the borrower/homeowner is still responsible for property taxes, maintenance, etc., so there is still a need to consider your overall financial situation.

Third, researchers are still trying to figure out why so few people have taken HECMs to date. It's hard to pin down exactly, but our best guess is that much of the problem is the psychology of not leaving the family house to your heirs. If the value of the house is large enough to pay off the HECM with money left over, there will be a contribution to the estate, but of course the heirs will see less of this equity after the HECM is paid off. But in the end, it seems that many households see the decision to take an HECM as something more complicated than a simple net present value calculation. Research by economists such as Tom Davidoff and Irina Telyukova, among others, suggest these considerations are part of the story behind the low takeup rate so far. But we have much to learn about this, quite frankly.

Fourth, once someone decides to take out a reverse mortgage, there are other important decisions to make -- for example, whether to take all the money at once or to take the money in some schedule of payments (i.e., to turn your house into an annuity). It surprises many economists that most people who take HECMs take all the cash upfront. Economists love the idea of annuities, but normal people apparently love them a lot less!

Katie Doyle, managing editor at Bankrate.com, contributed the questions for this interview.

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