Stringent reverse mortgage rules near implementation

WASHINGTON — Interested in a reverse mortgage without a lot of hassles? Get your application in now. On April 27, a series of extensive "financial assessment" tests will make applying for a reverse mortgage tougher — much like applying for a standard home mortgage.

Reverse mortgages always have been different — available only to seniors 62 and older who have equity in their homes that they want to convert to cash. There are no repayments required until the borrower sells the house, moves out or dies. Homeowners' main responsibilities are to keep current on local property taxes, pay hazard insurance premiums and keep the place in reasonable condition.

The Federal Housing Administration has for three decades run the dominant insured reverse mortgage program in the country, and it has been relatively easygoing when it comes to underwriting. If you qualified on age and equity, you had a good shot at getting a loan.

But during the recession and mortgage bust years, thousands of borrowers fell into default because they didn't pay required property taxes and hazard insurance premiums. Further, real estate values plunged, producing huge losses on defaulted and foreclosed properties for the FHA. The losses got so severe that the Treasury Department had to provide the FHA with a $1.7 billion bailout in 2013, the first in the agency's history since its creation in the 1930s.

All of which led to the upcoming dramatic changes. Applicants now must demonstrate upfront that they have both the "willingness" and the "capacity" to meet their obligations. Lenders are going to pull borrowers' credit reports, just as they do with other mortgages.

Applicants will need to show that they paid their real estate taxes, homeowner association fees and other property-related charges on time for at least the past 24 months. They will be asked to produce documentation of their employment status, income and financial assets, as well as undergo a "residual income" analysis that examines all their monthly expenses and cash flow.

Inadequate marks on these tests may require borrowers to create a "life expectancy set aside" — essentially a reserve account or escrow funded wholly or in part from their loan proceeds. For some borrowers, the set-asides may be so substantial they'll be left with minimal cash at closing, making the entire reverse mortgage process a waste of time.

All of which, say reverse mortgage industry experts, will exclude potentially thousands of senior homeowners from obtaining a reverse mortgage, especially those who are on the margins economically and need the cash to help pay for ongoing household expenses.

Reza Jahangiri, CEO of Orange, Calif.-based American Advisors Group, the highest-volume reverse mortgage lender, said his company expects a decline in loan activity by "8 to 10 percent" after the assessment rules take effect. He also expects a shift toward "mainstream" borrowers who seek to use a reverse mortgage as part of their overall retirement planning, including raising money to buy a new house or to establish a flexible line of credit they can draw from. Many seniors currently can't qualify for bank home-equity credit lines, he said, but with adequate credit, income and assets, can qualify for a reverse mortgage in the form of a credit line.

Maggie O'Connell, who originates FHA-insured reverse mortgages for The Federal Savings Bank from offices in Reno, Nev., and Danville, Calif., said she's been scrambling "to get people in before the deadline" who might encounter difficulty — or be turned off by all the required documentation — under the new rules. Though she may do fewer loans in the short term, she said, in the long term the tougher rules "are probably a good thing" because they will prevent weak borrowers from taking out loans they can't handle and that will eventually end up in default, "which is bad for them and bad for us."

Bottom line: Tougher credit standards have come to reverse mortgages — finally. Before applying, be aware of the types of documentation you'll need. And when you talk with a lender or financial counselor about a reverse loan, make sure you involve the entire family, so everybody knows what you are getting into.

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