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Reverse Mortgage Reform 2013 (Updated HECM Guidelines)
Is the weather forecast calling for snow? Sure, it’s summer, but a reverse mortgage law just passed that got the support of both Republicans and Democrats, and in today’s political environment, a law that gets bipartisan support is about as rare as a blizzard in August. OK, all joking aside, the new law – called the Reverse Mortgage Stabilization Act – includes lots of reverse mortgage reforms that make these loans much safer and more appealing to seniors who’d like to tap into their home’s equity.
To recap: For most people, the only way to make use of the equity you’ve built up in your home is by selling or refinancing and pulling equity out at closing. A reverse mortgage (you may know it by its more formal name – Home Equity Conversion Mortgage or HECM) lets people who are at least 62 years old access that equity using an entirely different approach: Homeowners can take money out of their homes without having to make any monthly payments. What’s more, the homeowner keeps the title to their home for the entire time they’re living in it. You can read all about reverse mortgages by clicking here or by visiting the Federal Trade Commission (FTC) website.
The new law includes reforms designed to protect both consumers and lenders. Here’s a quick rundown:
- First, the law requires borrowers have a financial assessment before being approved for a loan to determine which HECM products – if any – are most appropriate for their needs so homeowners don’t end up taking on a loan that’s not right for them. This protects consumers from unscrupulous or unknowledgeable lenders who may promote loans that don’t meet the homeowner’s needs, and it also protects lenders by making sure the loans they write satisfy their lending requirements.
- Second, when necessary, the law requires an escrow account be established to prevent defaults that can occur when a homeowner falls behind in paying homeowner’s insurance or property tax bills. This step protects lenders from losing their investment in homes when homeowners can’t pay these bills or simply refuse to.
- Third, the law limits the amount homeowners can draw when the loan is initially approved, only allowing the amount needed to pay “mandatory obligations” such as closing costs and mortgage liens. The goal here is to protect the fund that oversees reverse mortgages from losses that can occur when the entire amount of the loan is drawn out immediately after signing the loan agreement.
- And finally, the new law requires that changes to the rules regarding reverse mortgages can only be made if those changes are designed to improve the financial safety and reliability of the program.
After the bill was signed into law, the bill’s Republican sponsor Congressman Mike Fitzpatrick said, ““By signing this bipartisan bill into law today, the law now respects that desire while at the same time enacting safeguards for both lenders and seniors. Republicans and Democrats worked together to get something done in Washington.”
Get out your snow shovels.