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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, August 31, 2008 New housing bill limits reverse mortgage fees By Tom Kelly, Herald Columnist "Some people will say reverse mortgages are absolutely too expensive while others will tell you they are the greatest deal on earth. What all the years of talking to seniors about reverse mortgages has taught me is that you can show somebody what something costs, but you cannot tell them what it's worth to them,'' said Ken Scholen, founder of the nonprofit National Center for Home Equity Conversion. Seniors scrutinize costs. They preciously guard their pennies, even when they have quite a few to spend. According to a 2007 AARP survey, cost is the reason 63 percent of reverse-mortgage shoppers ultimately decided against applying for the loan. In fact, 69 percent of actual borrowers believed that reverse mortgage costs were high, the survey revealed. Some help is right around the corner. The Housing and Economic Recovery Act of 2008 is several hundred pages long and includes many different items that will have to be implemented during the weeks ahead. One critical item is the amount of origination fees lenders can charge on the country's most popular reverse-mortgage program. A reverse mortgage is a loan against a home that is not payable until the homeowner dies, sells the home or permanently moves out of the home. Reverse mortgages allow homeowners age 62 and older to turn the equity in their home into cash without having to move, give up title or make a monthly mortgage payment. There is no minimum credit or income requirement to qualify for a reverse mortgage. The Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, insured 107,367 Home Equity Conversion Mortgages (HECMs) in 2007 compared with 43,131 for 2005. The HECM is the most popular reverse mortgage program and accounts for nearly 85 percent of the reverse market. The housing bill recently reduced the maximum fee to 2 percent on the initial $200,000 of the home's value and 1 ­percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of your home's value or the county lending limit, whichever is lower. The new formula for maximum origination fees will become effective concurrently with the implementation of the new HECM loan limits. The loan limits still need to be clarified. Peter Bell, president of the National Reverse Mortgage Lenders Association, said the group still does not have a definitive answer as to whether the bill establishes a single national loan limit at $417,000, or $625,500, or a sliding scale somewhere in between. "Because one section of the bill points to another, and then the other section references prior legislation, etcetera, there is some confusion and variation of opinion on exactly what the language in the bill means,'' Bell said. "We have had great legal minds interpreting it on our behalf and have been in constant discussion with (Capitol) Hill staffers and FHA. In the end, the conclusion drawn by HUD's counsel, in consultation with congressional staff, will determine where we have come out.'' HUD has expressed its concern about companies marketing reverse mortgages with new limits before it determines what they should be. It has advised companies to wait until the issue was resolved before beginning its new marketing programs, suggesting possible disciplinany action relating to misleading advertising for those who don't. "More seniors are recognizing that traditional retirement tools, such as IRAs, pensions and 401(k)s are not providing sufficient income to help fund everyday living expenses and health care," Bell said. "Through proper education, more retirees are recognizing that the home they have lived in for so many years can now take care of them by using a reverse mortgage to access the equity accumulated over 20, 30, 40 years to help them living more comfortably." Reverse mortgage proceeds can be used for any purpose, and can be taken out as a lump sum, fixed monthly payments, line of credit or a combination. The loan amount depends on the borrower's age, current interest rates and the value and location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower's estate. A senior's home does not have to be owned free and clear to qualify for a reverse mortgage. Reverse mortgages are often used to retire existing debt on a home. Early reverse mortgage programs got a poor reputation because some were flawed and contained huge appreciation shares for the lender coupled with high upfront fees. Now, with the federal government insuring a majority of the reverse mortgages with no lender equity shares, the concept has become more acceptable and recognized by consumers. Thanks to the new housing bill, reverse mortgages will be less expensive to get. Reach Tom Kelly at news@tomkelly.com.

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