New reverse-mortgage rule aims to keep surviving spouses in home
Former Sen. Fred Thompson and the Fonz may pitch reverse mortgages on TV as a way for people to live a better life in the twilight years, but there are pitfalls to the product that federal agencies are starting to fix.
Beginning Aug. 4, new rules on reverse mortgages go into effect that will allow the spouses of borrowers who die to stay in their home without the threat of foreclosure if they continue to pay taxes, insurance and association fees.
Currently, the full repayment of the reverse mortgage is due after the death of the borrower, leaving a widow or widower whose name is not on the mortgage in the lurch for the debt or forced to sell the home. The change defers that payment until after the spouse’s death.
“This is critically important,” said Marty Sidman, a reverse mortgage specialist with Guaranteed Rate Inc. in Boca Raton, Fla. “They had to do something to protect the non-borrowing spouse.”
Reverse mortgages allow seniors 62 or older to convert their home equity into cash. Instead of paying the bank each month, the senior gets paid, either in a lump sum, a line of credit or monthly payments.
The loan is due, with interest, when the borrower dies, moves or sells the house.
In 2011, the Consumer Financial Protection Bureau counted 740,000 reverse mortgages nationwide. But the market has the potential to grow significantly as more baby boomers become eligible for the product. The first baby boomers, born in 1946, hit 62 in 2008, but most reverse mortgages are not taken out until homeowners are in their late 60s to early 70s.
The baby-boom generation — people born between roughly 1946 and 1964 — includes more than 43 million households, according to the bureau. Of those, 32 million are homeowners.
That’s why righting the rules now is key.
In a 2012 report, the Consumer Financial Protection Bureau cited confusion among borrowers about reverse mortgages and expressed concerns that borrowers are taking out loans at younger ages — a potential problem if they outlive their reverse mortgage. According to AARP, the average age of borrowers in 2012 was 72, down from 76 in 2000.
The report also noted that some marketing was deceptive and used government-looking seals to lead borrowers to believe that reverse mortgages were an entitlement program, like Medicaid.
Odette Williamson, a staff attorney with the National Consumer Law Center, said borrowers were counseled to leave younger spouses off reverse mortgages so the payout amount would be higher. The older a person is, the more they can receive from a reverse mortgage.
“A lot of spouses were being taken off the loans, and were being encouraged to do so with bad information,” Williamson said. “Sometimes they were plain misled and didn’t understand the consequences.”
The reverse mortgage changes, announced by the U.S. Department of Housing and Urban Development in late April, follow a 2013 judgment in favor of a Maryland homeowner who was facing eviction because he couldn’t pay back his wife’s reverse mortgage when she died.
The new rules also allow a reverse mortgage to be written even if one spouse is younger than 62. But the payout amount will be based on the younger spouse’s age.
“It’s a very common sense change,” said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association.
In addition to paying taxes, insurance and fees to remain in the home after a borrower’s death, the non-borrowing spouse must have stayed married to the borrower through his or her lifetime and live in the house as a primary residence.
Stan Kassan, who writes reverse mortgages in Palm Beach County, Fla., for Christensen Financial, said reverse mortgages are a benefit to seniors and can be used as an investment tool to gain bigger dividends.
But the product is still evolving.
“They had to make it a better product and they are doing it,” he said.