Score a big one for senior homeowners and their lobbyists. Reverse mortgages are now likely to be more plentiful in future years _ not less _ thanks to a major regulatory policy change agreed to recently (Sept. 22) by the Bush administration.
Until the change occurred, according to consumer advocates, the rapidly expanding reverse mortgage field faced an almost insuperable hurdle: a regulatory requirement that would have forced reverse mortgage lenders to assume that the homes they finance would never increase in market value.
Here's what happened and what it could mean to you. The reverse mortgage concept, a booming financial technique during the last three years, allows homeowners over 62 to use their real estate as a source of steady income.
Owners who have paid off all or most of their original mortgage debt can use their home as collateral for either monthly income supplements or for a credit line to be drawn upon as desired. Under certain reverse mortgages, for example, a 75-year-old homeowner can draw out fixed amounts ranging from $300 to $1,000 or more every month for as long as he or she continues to live in the house.
Alternatively, the same owner could opt for a $50,000 credit line from the lender _ ready to be tapped at short notice for medical or other expenses.
No repayments are required under either option until the owner moves out, sells or dies. At that point, the debt is paid off with accrued interest and loan fees from the sale proceeds of the property.
Dozens of private and government-backed reverse mortgage programs operate across the country. The Federal Housing Administration's (FHA) insured reverse mortgage program is offered through mortgage bankers in most states. Privately insured programs such as those of Louisville-based Capital Holding Corp. and San Francisco-based Providential Corp. are available in a more limited number of markets, but offer higher loan amounts than FHA.
Major financial institutions are readying new reverse mortgage programs, most notably the Federal National Mortgage Association (Fannie Mae). Virtually all the current lenders and future participants in the field, however, would have been hurt by a controversial federal financial rule that surfaced suddenly this summer.
The Securities and Exchange Commission (SEC) told Providential Corp., whose shares are publicly traded on the stock market, to change its accounting methods drastically. Henceforth, said the SEC, houses with reverse mortgages on them should be assumed to have zero future appreciation for purposes of calculating the firm's earnings. Since all reverse mortgage lenders must look to the resale values of their houses for their income, the SEC's rule threw the industry into an uproar.
The impact on consumers under the revised standard would have been dire. For instance, an FHA reverse mortgage that would have paid a senior homeowner $350 per month under current standards would pay only $190 a month maximum under the SEC's new ruling. Private lenders such as Providential would have been forced to make similar cuts.
The country's largest lobby group, the 34-million-member American Association of Retired Persons (AARP), was particularly upset at this prospect. By insisting on a zero-appreciation standard, AARP argued in a protest letter to the SEC, the federal government was creating a blatantly discriminatory system. Whereas ordinary lenders are permitted to assume for financial purposes that the value of their mortgaged homes will generally keep up with inflation, houses occupied by seniors in reverse mortgage programs would be treated as going backward: Zero appreciation in a market with 3 percent to 4 percent consumer price inflation, as at present, means a 3 percent to 4 percent net loss in real value every year.
The issue came to a head in mid-September when representatives of AARP and the National Center for Home Equity Conversion met with SEC officials to argue their case. Though technically an accounting matter, the controversy had obvious political significance.
As one mortgage industry lender put it, "Why would (the Bush administration) want to pick a fight with one of the most powerful voting groups (senior citizens) at a time when the president is 15 points behind Bill Clinton in the polls? It made no sense."
The chairman of the SEC, Richard C. Breeden, apparently agreed with that sentiment. Although the SEC had no official comment, a draft memorandum resolving the controversy was sent to AARP two days after the meeting. The solution essentially permits reverse mortgage firms to use "the best publicly available information" to forecast home value appreciation trends on their units. The memorandum also outlines a "neutral and objective" accounting format that reverse mortgage advocates say will actually enhance their ability to raise capital for larger numbers of loans in the future.
"It's a great step forward," said Don Redfoot of AARP. "It's exactly what (the reverse mortgage industry) needed to grow."
The upshot for you? If you're a senior home owner, or you will be later in the 1990s, you can expect greater choices and more competition among reverse mortgage lenders than you otherwise would have.
Who says the political system doesn't work?
1992, Washington Post Writers Group