New Rules for REVERSE MORTGAGES

New FHA Rules for Reverse Mortgages Borrowers are rushing to lock in reverse mortgages ahead of changes next month intended to strengthen the loan program for seniors but that will also reduce its popularity. "It has been a madhouse," said Helen Taylor, program director at the Northeast Denver Housing Center. "I am getting about 20 to 25 calls a day." Taylor, who conducts the mandatory counseling required to get a reverse mortgage, is hearing from applicants eager to qualify under existing rules rather than the ones coming Tuesday. Those changes, detailed in a letter from the Federal Housing Administration, include a 15 percent reduction in the maximum amount a borrower can access via a reverse mortgage. The FHA will also begin collecting 2.5 The Denver Post's reporters and editors offer news, analysis and commentary on the latest business, real estate, tourism, gambling and technology news in Colorado. percent of the home's value in an upfront mortgage-insurance premium rather than the 2 percent it has charged for those taking out 60 percent or more of their proceeds in the first year of a loan. And starting Jan. 13, borrowers will have to pass a financial assessment to measure whether they can handle insurance and property-tax payments. If not, funds will be set aside to cover those costs and prevent a default. "The changes coming down the pike are huge, and they will change how the business is done," said James Spray, an Arvada mortgage lender who specializes in reverse mortgages for home purchases. Spray expects the changes will cut his business by about a fifth, but he has heard from others in the industry who are expecting much larger reductions and are planning to get out. Reverse mortgages, also known as home-equity-conversion mortgages, allow a borrower to tap their home equity as a monthly payment or a line of credit. The program, around since 1989, is available to people ages 62 and older. A key goal of the reverse-mortgage program is to allow seniors to stay in their homes as long as possible, which has a larger societal benefit, said Rick Garcia, regional administrator of the U.S. Department of Housing and Urban Development's Region VIII, which covers Colorado and five nearby states. The Federal Housing Administration backed 1,072 reverse mortgages in Colorado and 54,676 nationwide in the last full fiscal year, which ended last Sept. 30. Those totals are down by about half from the peak seen in 2009 because of earlier changes in the program and a weaker housing market. Hedging against losses from reverse mortgages is difficult because it requires predicting two things correctly: how long a borrower will hold the loan and the direction of home prices. "We are trying to ensure the longer-term solvency of the fund," Garcia said. In 1990, the average age of a person taking out a reverse mortgage was 76.7. Last year, it had fallen to 71.9. Technically, a reverse mortgage doesn't have to be repaid until the borrower moves out or passes away. But younger borrowers are more likely to move than "age in place," and more of them have gone into default. Because of the unprecedented decline in home values during the housing bust, the FHA has found itself holding the bag for bigger losses than expected, depleting its insurance fund. "They have the new borrowers paying for the sins of the past borrowers," said Donald Opeka, president of Orion Mortgage in Broomfield. In the early days of the program, many borrowers turned to reverse mortgages to free up cash for spending, a use that declined with the equity available in homes. With more people carrying mortgages into retirement, reverse mortgages have increasingly been used to eliminate monthly loan payments, lenders said. Opeka said one client had a $1,200 monthly mortgage payment while collecting $1,400 a month in Social Security, an untenable situation. An inheritance allowed her to take out a reverse mortgage and stop the payments. "She has a chance of living in the house and staying there the rest of her life," he said. Some borrowers use the mortgages as a line of credit that prevents having to tap other money sources when conditions aren't favorable. At the other extreme are those who turn to reverse mortgages in desperation. "Seniors who shouldn't have gotten the mortgage got it," said Jim Veale, a senior vice president with Security One Lending in Lakewood, Calif. Veale said more people are retiring with heavy debt burdens that leave them unable to meet even the most basic requirements of covering insurance and taxes. Their defaults are what have depleted the reserve funds designed to protect taxpayers, although Garcia said the default rates on reverse mortgages are comparable to those on loans under other FHA programs. There had been hope within the industry that the reverse-mortgage program could make it over the hump without a bailout, but Friday the FHA requested $1.7 billion to shore up its long-term finances. Veale said there will need to be a major shift in how the loans are perceived and marketed, not as a loan of last resort but as a financial-planning tool. "We know we won't be able to help the most needy any longer," Veale said.