Reverse mortgages get smaller, fees rise

If you’ve been thinking of getting a reverse mortgage, September offers a model-year closeout sale opportunity.

A new set of rules governing Home Equity Conversion Mortgages (HECMs), the most popular type of reverse loan, was just issued by the U.S. Department of Housing and Urban Development, following up on Congressional action last month authorizing reforms.

The upshot: starting in October, HECM loan types will be consolidated, the size of loans will be smaller and fees will be higher. There will be new limits on how much you can drawdown on a HECM during the first year of your loan. And starting in January, some borrowers will be required to put a substantial part of their loan proceeds in escrow accounts to pay future property taxes and insurance costs.

The reforms are badly needed. The HECM program has experienced rising loan defaults, posing risk for the Federal Housing Administration insurance fund, which backstops the loans. But for borrowers, the new rules mean navigating a changed HECM market.

Currently, homeowners age 62 or older can qualify if they have sufficient equity in their property. The amounts you can borrow are determined by a formula that takes into account the percentage of the home’s value based on the borrower’s age and prevailing interest rates.

Although reverse loan borrowers don’t have to pay back their loans until they move out of their homes or die, defaults are possible because the loan terms require them to continue paying property taxes, hazard insurance and any required maintenance on their homes.

The changes are aimed at making HECMs safer for seniors, and to encourage their use as a long-term financial planning tool, rather than as a hail Mary pass.

My Reuters Money column today examines the HECM program’s key changes.