Many baby boomers will need to consider how their homes — and the value locked inside — will help finance their retirement years. Reverse mortgages could become an integral part of many retirees' financial plans.
Right now, practically anyone who is breathing can qualify for a reverse mortgage, but that might be about to change.
Most reverse mortgages, which allow homeowners 62 and older to tap their home equity, are made through the Federal Housing Administration, which insures the loans. But declining home prices after the housing crisis took a big toll on the federal program. So did the popularity of one type of mortgage, which allowed homeowners to withdraw the maximum amount of money available in a big lump sum.
The FHA eliminated that type of loan this year. But now the FHA says it will need to take even bigger steps by the beginning of its new fiscal year in October.
Because of the turmoil in the housing market and because many borrowers in the program didn't have enough money to pay their property taxes and homeowners insurance over the long term, the FHA wants to require borrowers to undergo a financial assessment. It may also factor in borrowers' credit scores, something it has not done in the past.
Before the agency can do either, it needs congressional approval. The House gave its assent last month, but it's unclear whether the Senate will follow suit.
If the FHA fails to get Congress' blessing, it will have to take more draconian actions in the coming months, according to FHA officials. That means that effective Oct. 1, yet another of its reverse mortgage products will probably be eliminated, leaving borrowers with options that would allow them to get access to 10 to 15 percent less cash than they can now.
"Instead of using a scalpel, they will have to use a hatchet," said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School.
Borrowers who are now contemplating what is called a HECM (pronounced HECK-um) Standard (for home equity conversion mortgage) reverse mortgage should know that it could disappear in the fall. (Of course, that doesn't mean borrowers should rush out and get one. We will probably know the fate of the loan sometime next month.)
With all reverse mortgages, the amount of cash you can obtain largely depends on the age of the youngest borrower, the home value and the prevailing interest rate. The older you are, the higher your home's value and the lower the interest rate, the more money you can withdraw. You don't have to make payments, but the interest is tacked onto the balance of the loan, which grows over time. When borrowers are ready to sell (or when they die), the bank takes its share of the proceeds from the sale, and borrowers or their heirs receive whatever is left, if anything.
FHA officials would prefer to keep all of the agency's mortgage offerings and instead put rules into place that would help ensure that they accept only borrowers who can actually afford to pay their property taxes and homeowners insurance, which is required to avoid foreclosure. Nearly 10 percent of reverse mortgage borrowers are in default because they failed to make those payments.
So here's what the FHA would like to do: First, make the loans contingent on the financial assessment, which would look at how much cash a borrower had left over after paying typical living expenses, in addition to property taxes, homeowners insurance, homeowner association dues, utilities and other debts. Credit scores would be considered, but the agency said they wouldn't be a major factor.
If borrowers were deemed risky, the FHA would require them to set aside money from the loan proceeds to cover property taxes and insurance in an escrow account of sorts. The agency also said it would like to cap the amount borrowers would be able to pull out at 60 percent of the maximum sum they were eligible for, or the amount needed to pay off their current mortgage, whichever was greater. (Reverse mortgage borrowers need to pay off their regular mortgage to obtain the reverse mortgage).