The end of reverse mortgages?
Negative fallout from the financial crisis and specifically the housing crisis has taken many forms and has impacted individuals across all ages and income levels. Another financial domino that's getting ready to fall, this time hitting seniors, is the reverse mortgage.
A reverse mortgage is a mortgage product that allows people who are 62 or older to covert their home equity into cash. This can be either a lump sum payment, a line of credit or monthly payments. The property must be a primary residence and owner occupied. The loan is due with interest when the borrower dies, moves, sells the house or fails to pay property taxes or homeowner's insurance. Traditionally, homeowners' heirs ultimately sell the house, pay off the loan and keep the balance.
This was a very popular program which provided a wonderful service to seniors who had equity in their homes but low income, allowing them to remain in their homes in their later years. Now, however, the program which has the backing of the federal government is in jeopardy on several levels.
Two major banks, Wells Fargo and Bank of America have announced that they are no longer offering reverse mortgages. Wells Fargo stopped taking applications for reverse mortgages on June 30, indicating unpredictable home values and additional restrictions as its reasons. Bank of America stopped these mortgages in February indicating the necessity of reassigning employees to loan modification work as well as the housing downturn and increased regulations.
That being said, there are still commercial lenders remaining in the reverse mortgage business for those seniors who still want to avail themselves of this product. However, applications for reverse mortgages could soon get more complicated with additional information required.
Also on the horizon for bank issued reverse mortgages is a decrease in the amount of equity that can be extracted from a home. After September, based on new federal regulations, the maximum reverse mortgage will be reduced to $417,000 from the current $625,500, unless Congress or the Department of Housing and Urban Development extends the higher limit. These limits could make the option of a reverse mortgage less attractive, especially when you factor in the high fees charged for these mortgages
Another option, instead of a bank issued reverse mortgage, is to setup your own reverse mortgage in conjunction with children or other heirs. The property could be purchased by an adult child and a private reverse mortgage set up to maintain the seniors in the house, much like the arrangement with the bank, with the adult child inheriting the property and the balance of the equity upon the death of the parent.
Families with multiple children could establish a limited partnership, which could also shelter some of the tax when the property is ultimately sold. Also, some families have the ability to established a revolving line of credit backed by the equity in the home to pay their parents' living expenses while still in their home. Although private reverse mortgages can actually result in reduced fees and streamlined paperwork, family members still have the same challenges as banks as it relates to reduced housing values. Any private reverse mortgage arrangement must be drawn up by an attorney in accordance with state laws.
Every time you think things are starting to level off, another problem evolves reminding you that not all the dominos have fallen yet.