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Why You Won't Get as Much Out of a Reverse Mortgage Now

NEW YORK ( TheStreet) -- The U.S. government is putting tighter restrictions on reverse mortgages, reducing the amount of equity homeowners can access through reverse mortgage deals.

In a reverse mortgage deal, homeowners 62 and older use their home equity to take cash out of their homes without having to make a mortgage payment. Reverse mortgage lenders take over the payments and get their investment back once the home is sold (usually once the homeowner dies or moves out.)

The changes come from the U.S. Department of Housing and Urban Development, which seeks to use its Home Equity Conversion Mortgage Program to reduce the risk linked to reverse mortgages. Consumers will no longer to be able to take their reverse mortgage payments in a lump sum and will face limits on just how much cash they can take out of a home, especially in the first year of an agreement.

"Our goal here is to make certain our reverse mortgage program is a financially sustainable option for seniors that will allow them to age in place in their own homes," Federal Housing Commissioner Carol Galante says.

HUD reports that demographic changes over the past decade have made reverse mortgages riskier, including:

  • A shift away from adjustable rate mortgages.
  • More homeowners accessing home equity lines of credit.
  • A higher number of younger mortgage borrowers with higher household debt amid "stagnant" home prices.

These changes have led to "substantial stress" in the agency's HECM program, which is projected to lose money this year. To tighten things up, HUD is proposing:

  • Restrictions on the amount of funds senior borrowers may draw down at closing and during the first 12 months after closing.
  • A mandated financial assessment for all HECM borrowers to ensure that they have the capacity and willingness to meet their financial obligations and the terms of the reverse mortgage.
  • Requiring borrowers to set aside a portion of the loan proceeds at closing (or withhold a portion of monthly loan disbursements) for the payment of property taxes and insurance based on the results of the financial assessment.

For reverse mortgage customers, the takeaway is this:

On Sept. 30, when the rules go into place, reverse mortgage customers will be able to take less equity out of their homes (about 15% less than the maximum available now, the National Association of Realtors says).

In addition, HUD will limit the cash that can be drawn from a reverse mortgage deal in the first year of a deal. The way Realtor.org pegs it, if you're a homeowner with a eligible draw down of $200,000, you could access only 60% of that amount, or $120,000, in the first year of a reverse mortgage deal.

"What regulators are trying to do is shift behavior so that people are more thoughtful and methodical about how they draw the money," says Peter H. Bell, president of the National Reverse Mortgage Lenders Association. "The changes are intended to put the program back on track and encourage people to take what they need and no more."

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