WASHINGTON — Three years ago, with his former partner suffering from cancer, Jim Dorsey decided to borrow against the equity on his Vashon Island, Wash., home with a reverse mortgage. The couple didn't have children and didn't plan to move, so a loan that didn't have to be repaid until he died seemed like a good deal.
Dorsey, 69, isn't so sure now.
The retired high school teacher figures the loan — which netted him a $75,000 lump sum after paying off his mortgage — will reduce his home equity by $100,000, compared with what it otherwise might have been, if he lives another decade.
Then again, Dorsey can stay in the house for as long as he pays his property taxes and homeowner's insurance. Plus, he won't be liable for the shortfall if his final loan balance exceeds his home's value, either because of falling real-estate prices or because he lives longer than expected.
That's because almost all reverse mortgages since 1989 have been insured by the Federal Housing Administration. The agency collects mortgage-insurance premiums from borrowers, much of which are used to make lenders whole if borrowers default or home prices drop.
“The feds are assuming the risk,” he said. “The bank is in the catbird seat.”
That risk has put the FHA's reverse-mortgage portfolio $5.25 billion in the hole as worrisome numbers of borrowers fail to keep up with taxes and insurance or convey their homes to the FHA rather than go through the expense of marketing and selling their properties.
In response, Congress recently passed legislation sponsored by U.S. Rep. Denny Heck, D-Wash., allowing the FHA to fast-track changes to stem the deficit. President Obama signed the bill. The agency plans to use the new authority to tighten lending terms that could reduce loan amounts or even disqualify some borrowers.
Among the proposed changes are requiring a review of applicants' finances before granting a loan, and mandating an escrow account to set aside money for taxes and insurance.
The new rules are scheduled to take effect Oct. 1.
The legislation's passage follows an FHA administrative action in April to steer borrowers to lower-fee, lower-payout loans to reduce stress on the agency's insurance fund.
Some consumer advocates fear the pending changes could lock seniors out of reverse mortgages or drastically lower their borrowing limits. That's a worry because retirement experts expect more pension- and savings-poor Americans to tap their home equity after their paychecks end.
The FHA intends to limit the amount borrowers can draw at the beginning of the loan, possibly tied to the size of the existing mortgage they need to pay off and other types of debt.
“We will get frantic calls from borrowers,” said Erin Reardon, a reverse-mortgage counselor with Solid Ground, a nonprofit anti-poverty group in Seattle. Any time rules change, borrowers are “rushed into getting the loan when they usually might have taken more time to think about it.”
The number of Americans taking out reverse mortgages fell for a third straight year to 54,591 in fiscal 2012. But that number is expected to spike in coming years as more baby boomers finance retirement.
Anthony Webb, research economist at the Center for Retirement Research at Boston College, said the need is being driven by the rising age for Social Security eligibility and inadequate savings.
But Webb put most blame on disappearing pensions. Between 1989 and 2010, the percentage of American workers with defined-benefit pensions that pay specific, promised sums fell by two-thirds to just 8 percent.
“I think more Americans, out of necessity, will turn to reverse mortgages,” he said.
Dorsey, who separated from his partner, said reverse mortgages come with trade-offs: cash now or equity later. He said fees ate up a substantial portion of his original draw.
“Do you need the cash? If so, then reverse mortgages may be a sound choice,” he said. “Do you value future equity? If so, then reverse mortgages may not be a good choice.”
Source: http://triblive.com/business/headlines/4541058-74/reverse-mortgages-borrowers#axzz2cQE9MiLT
Dorsey, 69, isn't so sure now.
The retired high school teacher figures the loan — which netted him a $75,000 lump sum after paying off his mortgage — will reduce his home equity by $100,000, compared with what it otherwise might have been, if he lives another decade.
Then again, Dorsey can stay in the house for as long as he pays his property taxes and homeowner's insurance. Plus, he won't be liable for the shortfall if his final loan balance exceeds his home's value, either because of falling real-estate prices or because he lives longer than expected.
That's because almost all reverse mortgages since 1989 have been insured by the Federal Housing Administration. The agency collects mortgage-insurance premiums from borrowers, much of which are used to make lenders whole if borrowers default or home prices drop.
“The feds are assuming the risk,” he said. “The bank is in the catbird seat.”
That risk has put the FHA's reverse-mortgage portfolio $5.25 billion in the hole as worrisome numbers of borrowers fail to keep up with taxes and insurance or convey their homes to the FHA rather than go through the expense of marketing and selling their properties.
In response, Congress recently passed legislation sponsored by U.S. Rep. Denny Heck, D-Wash., allowing the FHA to fast-track changes to stem the deficit. President Obama signed the bill. The agency plans to use the new authority to tighten lending terms that could reduce loan amounts or even disqualify some borrowers.
Among the proposed changes are requiring a review of applicants' finances before granting a loan, and mandating an escrow account to set aside money for taxes and insurance.
The new rules are scheduled to take effect Oct. 1.
The legislation's passage follows an FHA administrative action in April to steer borrowers to lower-fee, lower-payout loans to reduce stress on the agency's insurance fund.
Some consumer advocates fear the pending changes could lock seniors out of reverse mortgages or drastically lower their borrowing limits. That's a worry because retirement experts expect more pension- and savings-poor Americans to tap their home equity after their paychecks end.
The FHA intends to limit the amount borrowers can draw at the beginning of the loan, possibly tied to the size of the existing mortgage they need to pay off and other types of debt.
“We will get frantic calls from borrowers,” said Erin Reardon, a reverse-mortgage counselor with Solid Ground, a nonprofit anti-poverty group in Seattle. Any time rules change, borrowers are “rushed into getting the loan when they usually might have taken more time to think about it.”
The number of Americans taking out reverse mortgages fell for a third straight year to 54,591 in fiscal 2012. But that number is expected to spike in coming years as more baby boomers finance retirement.
Anthony Webb, research economist at the Center for Retirement Research at Boston College, said the need is being driven by the rising age for Social Security eligibility and inadequate savings.
But Webb put most blame on disappearing pensions. Between 1989 and 2010, the percentage of American workers with defined-benefit pensions that pay specific, promised sums fell by two-thirds to just 8 percent.
“I think more Americans, out of necessity, will turn to reverse mortgages,” he said.
Dorsey, who separated from his partner, said reverse mortgages come with trade-offs: cash now or equity later. He said fees ate up a substantial portion of his original draw.
“Do you need the cash? If so, then reverse mortgages may be a sound choice,” he said. “Do you value future equity? If so, then reverse mortgages may not be a good choice.”
Source: http://triblive.com/business/headlines/4541058-74/reverse-mortgages-borrowers#axzz2cQE9MiLT
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