Pulitzer Prize-winning journalist Saul Friedman (bio) writes the weekly Gray Matters column which appears here each Saturday. Links to past Gray Matters columns can be found here. Saul's Reflections column, in which he comments on news, politics and social issues from his perspective as one of the younger members of the greatest generation, also appears at Time Goes By twice each month.
Welcome to Older Americans Month, the theme of which, according to President Obama, is “Age Strong, Live Long.” I’ll buy that. And he pledged again that his administration is committed to strengthening Medicare, Medicaid and Social Security.
So why is he scaring the hell out of older Americans by appointing a commission filled with deficit hawks who threaten to cut benefits from these programs, including Social Security which adds nothing to the deficit but helps finance it?
But I digress from my purpose this time, which is to tell you that there’s a way, not used often enough, to protect yourself against too many medical bills, high property taxes and the downers in your retirement savings plans. I am referring to the federal government’s reverse mortgages which too many beleaguered older Americans have ignored. Some don’t want to mortgage a home that’s free and clear; some are discouraged from tapping the equity in their homes by children who are waiting for their inheritance.
So here’s some welcome news for older Americans who own their homes and can use some extra income and cash. The up-front costs for many FHA-guaranteed reverse mortgages have gone down, which means the possible proceeds will go up by as much as $10,000.
I’m referring to the most popular and safest reverse mortgage, the Home Equity Conversion Mortgage, fondly known as the HECM. It is the safest for the lender as well as the homeowner-borrower because it is backed, insured by the Federal Housing Administration which has never defaulted on a mortgage that it has guaranteed.
Indeed, of all the mortgages that have fallen on hard times, or have been the subject of scandalous behavior by bankers and investors, the HECM has been largely untouched by these troubles. Last year, the Department of Housing and Urban Development raised to $625,000 the value of a home that could qualify for a HECM.
But because of falling home values, the recession and its budget problems, HUD cut by ten percent the amount one could borrow on a reverse mortgage. As a result, HECMs have experienced a slump.
As The New York Times pointed out last month, “Consumers were becoming increasingly reluctant to sign up for reverse mortgages – homeowners could not pull out as much equity as they once could because of the drop in home values.”
As a consequence, the largest HECM lenders – Bank of America, Wells Fargo, Metlife Bank and my lender, Financial Freedom, have waived their origination and servicing fees on certain HECMs. The origination fee is usually two percent of the first $200,000 of the home value plus one percent of the value over that, with a maximum of $6,000. Normally those fees are deducted from the proceeds and tacked onto the end of the loan.
But as a result of the waiver, Metlife said, “homeowners could receive additional loan proceeds ranging from $3,500 to $10,000 or more.” The single condition is that borrowers must take the proceeds in a lumps sum rather than in periodic payments or a line of credit, which costs the lender more to service. If they choose payments or a line of credit, the fees are not waived.
Craig Corn, Metlife’s vice-president in charge of its reverse mortgager business, explained that the option to take a lump sum in exchange for a waiver of the fees can give home owners “additional proceeds to help them pay off existing debts, meet basic needs, cover unexpected expenses...or whatever else they feel is appropriate.”
Let me add that the proceeds of a reverse mortgage are tax free and you may wish to invest the cash or turn it into an annuity. As of last year, you may use the proceeds to buy a second, vacation home, as long as you sell the first home and pay off the loan.
I should add that if and when the mortgage is paid off by the borrower or his/her heirs, the fees and interest are tax deductible. In the meantime, of course, the home is yours to live in as long as you wish. Only if he home is vacated, does the loan come due.
Even with the downturn in home values and the proceeds for reverse mortgages, HECMs have become safer for lenders as well as home owners because FHA limits the proceeds of most HECMs to about 50 percent of the appraised home value, which means that there is a huge cushion to prevent default in case of declining home values. That also means that despite the accrued interest and fees on the tail end of the mortgager, chances are there will be sufficient equity remaining at the end of the loan, if heirs wish to take over the debt and sell the property.
There are a couple of dark clouds that could further depress the demand for HECMs. David Stevens, the FHA commissioner is seeking $250 million from HUD to offset defaults and costs to the program because of declining home values. This would be the first time in the 25 year history of the program that it needed possible help from the treasury. In addition, Stevens is seeking an increase in insurance premiums, which are built into the costs of a HECM. And Stevens asked for cuts in proceeds for younger borrowers.
Borrowers must be at least 62, but the older the borrower the higher the proceeds he/she would receive. Unless such changes are made to offset possible added costs of the HECM program, Stevens warned that HUD may have to cut proceeds by 21 percent next year. With such a reduction in proceeds – $23,000 to $27,000 — the program could become moribund.
Critics of the HECM program, most prominently, Senator Claire McCaskill (D - Mo.), has charged that lenders fail to tell borrowers of the downside of reverse mortgages, but most of those she cited were private loans. HECMs have been free of such problems and the National Association of Reverse Mortgage lenders have taken steps to keep HECMs clean of scams.
In addition she has worried that reverse mortgages could fall prey to “securitization,” investors who slice and dice mortgages as they have done with conventional mortgages. But reverse mortgages are safer – for investors as well as borrowers because they are insured by FHA.
All in all, then, HECMs are a good deal if you intend to remain in your home for at least five years; otherwise you’ll be saddled with the closing costs that will eat up the proceeds you get.To sum up HUD’s guide to HECMs:
- You must occupy your home (condo, or co-op) as your principal residence
- There are no income, credit or health requirements
- Social Security and Medicare benefits are not affected
- You keep title and may sell it at any time
- You may use HECM proceeds to buy a second, vacation home as long as the loan on the first home is paid
- And of course, no repayments as long as you occupy the home.
Still it would be wise to shop for a provider who may be able to arrange the loan and lead you through the process. HUD requires that each borrower undergo counseling by an approved agency (cost is $125). The counseling of the National Council on Aging, is even better and free. Call 800-510-0301.
And you can calculate the proceeds you may expect at the HUD website or call 1-800-530-6434.
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