Federal legislators are divided on numerous topics in the nation’s capitol, but expanding the possibilities for senior citizens to live more comfortably is not one of them.
Members from both sides of the aisle are finally seeing the light on reverse mortgages, the once-controversial program that allows seniors to draw from the equity in their home without making payments or outliving their home’s value. The first step was the recent passage of the Reverse Mortgage to Help America’s Seniors Act by the U.S. House of Representatives, eliminating the cap on the number of reverse mortgages that can be insured by the Department of Housing and Urban Development.
The bill, sponsored by Reps. Michael Fitzpatrick, R-Pa., and Jim Matheson, D-Utah, amends the National Housing Act by removing the existing cap of 250,000 reverse mortgages that HUD can insure at any given time. Right now, there are about 150,000 Home Equity Conversion Mortgage (HECM) loans outstanding, according to the National Reverse Mortgage Lenders Association.
A Senate version of the bill, introduced by Sen. Rick Santorum, R-Pa., is pending approval and will be considered earlier this year. Both bills enjoy bi-partisan support in Congress and are endorsed by consumer groups, such as AARP, formerly known as the American Association of Retired Persons.
During the most recent federal fiscal year, ending Sept. 30, 2005, HUD insured a record number of reverse mortgages — 43,131 — for a fifth consecutive year. The federally insured HECM accounts for 90 percent of all reverse mortgages made in the United States.
When Congress created the HECM program in 1988, a cap was imposed so lawmakers could periodically monitor the program’s performance and costs to the government. Now that the program has a track record, there’s no continuing need for a cap because the HECM program generates sufficient funds to cover its costs through mortgage insurance premiums paid by borrowers.
After eliminating the cap on the number of HUD loans, lawmakers plan to take aim on raising the amount of cash seniors can pull from their homes. Two privately funded national studies showed that Puget Sound area participants were frustrated with the inability to fully tap their large and growing equity. Respondents noted their increasing property values and living expenses, as well as their difficulty in making ends meet with the current HECM loan limits.
Rep. Jay Inslee, D-Wash., who co-sponsored the elimination of the loan cap, said he plans to introduce a bill where the location of the home is not as big of a factor in determining the amount of a government-insured reverse. Lenders have been pushing for a single national limit so that home equity would be the main variable.
“I am working on a bill I hope at some point will pass, that will also go to a unified limitation in the dollar amount, the cap that now exists and limits the amount of equity that our seniors can get out of their homes,” Inslee said. “Seniors are equity-rich but cash-poor in a lot of circumstances. We are also finding that seniors are using these reverse mortgages in new ways, to help their grandchildren with their college education, for their recreation, as well as the obvious reasons, for health care and assisted-living facilities and the like. So this has tremendous opportunity.”
A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their homes, without having to sell the home, give up title, or take on new monthly mortgage payments. Loan proceeds can be used for any purpose, and taken out as a lump sum, fixed monthly payments, line of credit, or a combination. The loan amount depends on the borrower’s age, current interest rates, and the value and location of the home.
A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s estate. A senior’s home does not have to be owned free and clear to qualify for a reverse mortgage. Reverse mortgages are often used to retire existing debt on a home.
The early reverse mortgage programs got a poor reputation because some were flawed and contained huge appreciation shares for the lender coupled with big-time upfront fees. Now, with the federal government insuring a majority of the reverse mortgages with no lender equity shares, the concept has become more acceptable and recognized by consumers. Some of the negativity of the early reverses also was a result of the risk-adverse GI Generation, still the prime target for the next several years before the early boomers, or Silent Generation, come around the senior corner.
Tom Kelly’s new book “The New Reverse Mortgage Formula” (John Wiley & Sons) is now available in local bookstores and on Amazon.com. Tom can be reached at news@TomKelly.com.
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