A reverse mortgage, also known as a reverse-annuity mortgage or a home equity conversion mortgage, is a special type of home equity loan for individuals age sixty-two (62) and older. Reverse mortgages allow owners to convert a portion of the equity in their homes to cash, in order to subsidize living expenses and other monetary needs. Typically, the loan proceeds do not have to be repaid during the homeowner’s lifetime, are not counted as taxable income, and do not affect the homeowner’s eligibility for Social Security or Medicare benefits.
Reverse mortgages were created as a mechanism to reduced financial stress on aging Americans who seek to convert the equity in their homes into a stream of income without having to sell their residence or relocate. A reverse mortgage functions similarly to a line of credit, with the lender making payments to the home owner, only instead of requiring repayment during lifetime, the lender receives a claim to the homeowner’s property after death.
For many elderly individuals within the United States this system is particularly attractive as a means for securing an enjoyable retirement and ensuring that all lifetime needs are met. Certain protections are afforded to homeowners electing to utilize the benefits of a reverse mortgage, including the security that the lender may never force the sale of the property, and the homeowner and their heirs may never be forced to repay additional sums to the lender which exceed the value of the property.
The 2010 amendments to the Real Estate Settlement Procedures Act (RESPA) change the way in which lenders must complete disclosures required under the Act, affording lenders less wiggle-room in their estimation of costs to the borrower, in an attempt to ease the mortgage shopping process for consumers. Traditionally, RESPA has required that a lender provide all borrowers with a Good Faith Estimate (GFE), a document showing the costs that a lender will charge the borrower in conjunction with the loan, as well as a Settlement Statement (HUD-1), a document that provides an itemized listing of the funds that were paid at closing. Under the new legislation, the GFE and the HUD-1 forms must essentially match, as the new RESPA amendments allow for no more than a ten-percent (10%) difference between many amounts initially quoted on a GFE and those listed on the HUD-1 at the closing table.
The unconventional nature of a reverse mortgage, in addition to the new more stringent reporting requirements under the 2010 amendments, have caused many lenders to question how the costs should be reported on the GFE and HUD-1. On November 16, 2009, in an attempt to quell industry anxiety over the new requirements, the U.S. Department of Housing and Urban Development (HUD) released its “New RESPA Rule FAQs” (FAQs).
The informational pamphlet attempts to address many questions regarding completion of the GFE and HUD-1 in the case of reverse mortgages. For instance, unlike conventional mortgages, a reverse mortgage does not have a traditional “loan amount,” which is a required figure on both the GFE and HUD-1. The FAQs dictate, that on the GFE and HUD-1, lenders must list the initial principal limit calculated for the reverse mortgage, as opposed to a traditional loan amount. The FAQS also reveal that the unforeseen nature of many occurrences affecting a reverse mortgage, such as the loan term conditioned on the lifespan of the homeowner, will not be a hindrance to the proper completion of the GFE and HUD-1, because the lender may list “Not Applicable” or “N/A” for these required line items under which a reverse mortgage does not seem to fit.
In the face of the apprehension harbored by many lenders over compliance with the new RESPA requirements, these FAQs are extremely helpful in reducing noticeable industry tension. While these answers ease worries about compliance with the new RESPA amendments, they do little to forecast how helpful the changes will be in protecting homeowners seeking to utilize the benefits of a reverse mortgage. With so many sections of the GFE and HUD-1 settlement statement clearly not applicable to the unique circumstances surrounding a reverse mortgage, it remains to be seen how helpful these documents will actually be in protecting consumers and allowing borrowers to shop for the lowest loan costs.
For additional information, please see the U.S. Department of Housing and Urban Development’s “New RESPA Rule FAQs” at: http://nhl.gov/offices/hsg/ramh/res/resparulefaqs.pdf