Christopher Mayer, Columbia Business School professor, says "You have $3 trillion in housing wealth among older Americans. You have large institutions exiting the market, and more and more elderly with housing debt coming out of the crisis, as well as other kinds of debt.
A reverse mortgage is a loan made to a homeowner typically age 62 or older with no payments due as long as the borrower occupies the home. The lender aims to profit from fees when making the loan and the sale of the home when the borrower moves or dies. One danger is that the borrower will spend the proceeds too quickly, leaving nothing to live on.
In 2012, the Consumer Financial Protection Bureau warned that retirees taking out assets as a lump sum through a reverse mortgage could find themselves impoverished later. Borrowers without the funds to pay property taxes and insurance could end up losing their homes, the agency said. In some cases, brokers have persuaded reverse-mortgage borrowers to invest the cash they received in dodgy financial products.
To address those issues, the Federal Housing Administration, which insures almost all reverse mortgages, instituted rules limiting the amount of equity borrowers can withdraw upfront. In 2014, the agency also started requiring lenders to verify that borrowers can afford to pay property taxes and insurance. In addition to protecting consumers, the changes are intended to stem projected losses of $2.8 billion on the $88 billion in reverse mortgages the agency insures. Losses occur when homes sell for less than the loan's amount.
"These changes all make this a much more attractive business, and the product is a better product," says Mayer.
Under the new rules, borrowers will have access to only 60 percent of their equity at closing or during the first year of the loan. Even with those limits, homeowners need to be careful that they use the funds appropriately, say Stephanie Moulton, an associate professor at the John Glenn School of Public Affairs at Ohio State University. "It is becoming a different product than it was even two years ago, and it is a safer product, but there are still risks," says Moulton, who is studying reverse-mortgage defaults. "Any time you take an asset and you spend it, you have to have a good plan for how you're going to spend that money."
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