Thursday, December 13, 2012
Federal Housing Administration Proposes Reforms For Reverse Mortgage Program
Consumer Advocates Urge Additional Protections For Borrowers
WASHINGTON, D.C. – In a letter to the Department of Housing and Urban Development sent today, Consumers Union and the California Advocates for Nursing Home Reform applauded the agency for proposing steps to strengthen its reverse mortgage program, but urged federal regulators to consider a more comprehensive package of protections to ensure reverse mortgages are a safe financial option for seniors.
“More and more reverse mortgage borrowers are opting to take a lump sum payment at increasingly younger ages,” said Norma Garcia, senior attorney and manager of the financial services program of Consumers Union, the policy and advocacy arm of Consumer Reports. “These borrowers are at higher risk of prematurely using up all their equity and losing their homes. FHA should be applauded for recognizing a serious problem and proposing steps to remedy it. But we need comprehensive reforms to ensure that borrowers are truly protected.”
Reverse mortgages enable borrowers who are 62 or older to obtain income by tapping the equity in their home through a lump-sum payment, monthly scheduled payments, or lines of credit. The reverse mortgage loan becomes due when the borrower dies, leaves the home for 12 consecutive months or more, or fails to maintain the property or pay homeowners insurance or property taxes. Reverse mortgage borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant.
According to a June 2012 study by the Consumer Financial Protection Bureau, up front lump sum payments now account for 70 percent of new FHA-insured reverse mortgages and the average age of borrowers is 72. Borrowing a lump sum and too soon can result in seniors depleting their home equity prematurely. After exhausting their home equity, many senior borrowers will have no resources to fall back on.
At a recent Senate Banking Committee hearing, Housing and Urban Development (HUD) Secretary Shaun Donovan proposed both immediate, interim steps and longer-term changes to reduce losses and permanently strengthen the FHA’s Home Equity Conversion Mortgage (HECM) program. In the short term, the FHA is proposing to use its existing authority to reduce the maximum amount of funds available to a HECM borrower by consolidating its HECM Standard and HECM Saver programs and limiting loan amounts to the maximum HECM Saver amount. The maximum loan amount available under the HECVM Saver program is approximately 10 to 18 percent less than the HECM Standard program of $625,500. To reduce its costs of disposing properties mortgaged with a HECM, the FHA will permit estate executors to either sell such properties or convey them to HUD for disposal.
The FHA is proposing longer-term changes that would require legislative action or rule making. These include limiting the borrower’s draw at origination to mandatory obligations; requiring the performance of a financial assessment to determine the suitability of various HECM products for individual borrowers; and establishing a tax and insurance set-aside or an annuity to ensure there is sufficient equity available to pay taxes and insurance to avoid defaults from non-payment of taxes and insurance.
Consumers Union has long supported requiring lenders and brokers to perform a suitability assessment that evaluates whether the loans put borrowers at risk of losing their homes, if the borrower understands the complex nature of the contract, and if there are more cost effective alternatives available to the borrower.
“The FHA’s proposals are a positive step that will help ensure borrowers don’t wind up with a reverse mortgage that may not be suitable for them,” said Prescott Cole, Senior Attorney with the California Advocates for Nursing Home Reform. “But more must be done to protect seniors and their families. Too many seniors are falling through a fiscal trap door while trying to unlock their home equity with a reverse mortgage.”
Consumers Union and the California Advocates for Nursing Home Reform called on Congress and federal regulators to consider a number of additional steps to protect seniors, including:
Establish a fiduciary responsibility for the loan: Lenders and brokers must be required to act in the best interests of the borrower and should be held liable for violating this fiduciary duty.
Outlaw deceptive marketing: All reverse mortgages should be required to include information to help borrowers determine whether the loans are suitable for them.
Adopt stronger prohibitions on cross promotions: Prohibitions against cross promotions of other financial products by lenders and brokers should extend to non-HECM loans. Insurance agents and brokers should be held liable for selling an annuity when it is purchased with reverse mortgage funds.
Strengthen the quality and content of counseling: HUD counselors should be required to hold an in-person session with prospective borrowers to determine whether a reverse mortgage is suitable for the borrower. The counselor should deny a counseling certificate to the borrower if the loan is not in the best interest of the senior.
Protect non-borrowing spouses and tenants: Spouses and tenants whose names are not on the reverse mortgage loan should be notified about their limited rights to remain in the home after the borrower dies or permanently moves out of the home.
For more information, see Reverse Mortgage Tips For Consumers.