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For homeowners who were looking to the federal government’s reverse mortgage program to supply lots of cash for their retirement years, here’s a heads-up: The pipeline just got narrower.
Pressed by Congress to slash losses, the Federal Housing Administration last week outlined a series of steps designed to limit the maximum amounts that seniors can draw down on their homes and to make qualifying for a reverse mortgage tougher.
Starting in January, applicants for FHA-backed reverse mortgages will for the first time have to qualify under comprehensive new “financial assessments” – covering credit history, household cash flow and debt levels – to make sure they have the “capacity and willingness” to meet their financial obligations under the terms of the loan. At the same time, they may also be required to set aside sizable portions of their drawdowns to handle property taxes and hazard insurance for years to come. As early as next month, some applicants will also be required to pay substantially higher FHA insurance premiums if they pull out hefty amounts of funds upfront at closing.
Reverse mortgages are limited to homeowners 62 and older, and allow them to use the equity in their properties to provide funds for their retirement years. Borrowers need not repay their principal balances – plus compounded interest charges – until they move from the home, sell it or die.
FHA’s insured reverse-mortgage program, which is hawked aggressively by TV pitchmen, including former Tennessee Sen. Fred Thompson, Henry “the Fonz” Winkler and Robert Wagner, dominates the field. But losses to FHA’s insurance funds caused by reverse mortgages have mounted in recent years, and could trigger a nearly $1 billion bailout by the Treasury. FHA hopes to avoid that, however. The newly imposed eligibility and drawdown rules are intended to cut losses and help achieve greater financial stability for the program, according to Carol J. Galante, FHA’s commissioner.
Limits on the amounts that seniors can draw down, higher mortgage insurance fees and rigorous financial vetting of applicants are worrying some lenders and brokers active in the program. They estimate that the maximum drawdowns seniors can obtain will be reduced by about 15 percent, compared with the popular “standard” version of the program that has now been phased out.