Congress this week passed a law that reforms reverse mortgages, making them more restrictive, but ensuring that the program remains solvent.
Most reverse mortgages, which allow homeowners 62 and older in need of money for retirement to tap the equity in their homes, are made through the Department of Housing and Urban Development, or HUD, and are guaranteed by the Federal Housing Administration, or FHA. These loans are based on the value of the home and the age of the borrower. The higher the value of the home and the older the borrower, the more the homeowner can take out. It doesn't have to be repaid until the borrower moves or dies. Then the lender takes its share of the proceeds of the sale of the property, and the borrower or heirs get anything that is left. If the sale price isn't enough to cover the loan, FHA takes the loss.
Previously, there was no loan underwriting, and reverse mortgage borrowers didn't have to prove that they were creditworthy. In the last few years, because of the economy, many holders of these reverse mortgages have been unable to pay their property taxes and keep their homes insured. As a result, last year FHA foreclosed on nearly 10 percent of properties with a reverse mortgage.
The bill, known as the Reverse Mortgage Stabilization Act, will change the rules. HUD Secretary Shaun Donavan says these are the key reforms:
New underwriting standards. The lender must perform financial assessments of potential borrowers to determine whether they are good candidates for a reverse mortgage. There will be different standards for each type of reverse mortgage.
Tax and insurance set-asides will be required. This will prevent borrowers -- and FHA -- from defaults due to nonpayment of taxes and insurance.
Limits on immediate funds. This prevents borrowers from taking the proceeds available to them all at once when they first get the reverse mortgage. This not only gives borrowers greater flexibility, it also helps guarantee there will be money left to cover increases in taxes and insurance.
Includes spouses -- no matter their age -- on the loan. This protects surviving spouses from losing their home.
Reverse mortgages can be a valuable retirement planning tool. Allowing HUD to keep these plans solvent is a wise move.