Reverse mortgage

Eligibility

Reverse mortgages are available in Australia. Under the Responsible Lending Laws, the National Consumer Credit Protection Act was amended in 2012 to incorporate a high level of regulation for reverse mortgage. Reverse mortgages are also regulated by the Australian Securities and Investments Commission (ASIC) requiring high compliance and disclosure from lenders and advisers to all borrowers.^[5]

Borrowers should seek credit advice from an accredited reverse mortgage specialist before applying for a reverse mortgage. Anyone who wants to engage in credit activities (including lenders, lessors and brokers) must be licensed with ASIC or be a representative of someone who is licensed (that is, they must either have their own licence or come under the umbrella of another licensee as an authorised credit representative or employee) (ASIC)^[6]

Eligibility requirements vary by lender. To qualify for a reverse mortgage in Australia,

• the borrower must be over a certain age, usually 60^[7] or 65;^[8] if the mortgage has more than one borrower, the youngest borrower must meet the age requirement^[7]
• the borrower must own the property, or the existing mortgage balance must be low enough that it will be extinguished by the reverse mortgage proceeds, thus leaving the reverse mortgage as the only debt that remains secured against the property.^[7]

Loan size and cost

Reverse mortgages in Australia can be as high as 50%^[7] of the property's value. The exact amount of money available (loan size) is determined by several factors:

• the borrower's age, with a higher amount available at a higher age^[7]
• current interest rates
• property value^[7]
• the property's location^[7]
• program minimum and maximum; for example, the loan might be constrained to a minimum of $10,000^[7] and a maximum of between $250,000 and $1,000,000 depending on the lender.

The cost of getting a reverse mortgage depends on the particular reverse mortgage program the borrower acquires. These costs are frequently rolled into the loan itself and therefore compound with the principal.^[7] Typical costs for the reverse mortgage include:

• an application fee (establishment fee) = between $0^[9] and $950^[10]
• stamp duty, mortgage registration fees, and other government charges^[10] = vary with location

The interest rate on the reverse mortgage varies. Some programs used to offer fixed rate loans,^[7] while others offer variable rate loans.^[10] Since the update of the National Consumer Credit Protection Act in September 2012, new reverse mortgage loans are not allowed to have fixed rates.

In addition, there may be costs during the life of the reverse mortgage. A monthly service charge may be applied to the balance of the loan (for example, $12 per month^[8]), which compounds with the principal.^[7] The best products have no monthly fees.

Proceeds from a reverse mortgage

The money from a reverse mortgage can be distributed in several different ways:^[7]

• as a lump sum, in cash, at settlement;
• as a Tenure payment, a monthly cash payment;
• as a line of credit, similar to a home equity line of credit;
• as a combination of these.

Taxes and insurance

The borrower remains entirely responsible for the property. This includes physical maintenance.^[7] In addition, some programs require periodic reassessments of the value of the property.^[7][11]

Income from a reverse mortgage set up as an annuity or as a line of credit should not affect Government Income Support entitlements.^[7][12] However, income from a reverse mortgage set up as a lump sum could be considered a financial investment and thus deemed under the Income Test; this category includes all sums over $40,000 and sums under $40,000 that are not spent within 90 days.^[12]

When the loan comes due

Most reverse mortgages must be repaid (including all unpaid interest and fees) when they leave the home permanently. This includes when they sell the home or die. However, most reverse mortgages are owner-occupier loans only so that the borrower is not allowed to rent the property to a long-term tenant and move out. A borrower should check this if he thinks he wants to rent his property and move somewhere else.^{[citation needed]}

A common misconception is that when the borrower dies or leaves the home (e.g., goes to an aged-care facility or moves somewhere else) the house must be sold. This is not the case; the loan must be repaid. Thus, the beneficiaries of the estate may decide to repay the reverse mortgage from other sources, sale of other assets, or even refinancing to a normal mortgage or, if they qualify, another reverse mortgage.^{[citation needed]}

Prepayment of the loan—when the borrower pays the loan back before it reaches term—may incur penalties, depending on the loan.^[7][10] An additional fee could also be imposed in the event of a redraw.^[10] Under the National Credit Code, penalties for early repayment are illegal on new loans since September 2012; however, a bank may charge a reasonable administration fee for preparation of the discharge of mortgage.

All reverse mortgages written since September 2012 must have a "No Negative Equity Guarantee". This means that if the balance of the loan exceeds the proceeds of sale of the property, no claim for this excess will be made against the estate or other beneficiaries of the borrower.^[7][11]

On 18 September 2012, the government introduced statutory 'negative equity protection' on all new reverse mortgage contracts. This means the borrower cannot end up owing the lender more than their home is worth (the market value or equity). In a reverse mortgage begun before 18 September 2012, the contract specifies whether the borrower is protected when the loan balance ends up being more than the value of the property.^[13]

When the reverse mortgage contract ends and the borrower's home is sold, the lender will receive the proceeds of the sale and the borrower cannot be held liable for any debt in excess of this (except in certain circumstances, such as fraud or misrepresentation). Where the property sells for more than the amount owed to the lender, the borrower or his estate will receive the extra funds.^{[citation needed]}

Eligibility

To qualify for the HECM reverse mortgage in the United States, borrowers generally must be at least 62 years of age and the home must be their primary residence (second homes and investment properties do not qualify).^[26]

On April 25, 2014, FHA revised the HECM age eligibility requirements to extend certain protections to spouses younger than age 62. Under the old guidelines, the reverse mortgage could only be written for the spouse who was 62 or older. If the older spouse died, the reverse mortgage balance became due and payable if the younger surviving spouse was left off of the HECM loan. If this younger spouse was unable to pay off or refinance the reverse mortgage balance, he or she was forced either to sell the home or lose it to foreclosure. This often created a significant hardship for spouses of deceased HECM mortgagors, so FHA revised the eligibility requirements in Mortgagee Letter 2014-07.^[27] Under the new guidelines, spouses who are younger than age 62 at the time of origination retain the protections offered by the HECM program if the older spouse who got the mortgage dies. This means that the surviving spouse can remain living in the home without having to repay the reverse mortgage balance as long as he or she keeps up with property taxes and homeowner's insurance and maintains the home to a reasonable level.

For a reverse mortgage to be a viable financial option, existing mortgage balances usually must be low enough to be paid off with the reverse mortgage proceeds.^[28] However, borrowers do have the option of paying down their existing mortgage balance to qualify for a HECM reverse mortgage.

The HECM reverse mortgage follows the standard FHA eligibility requirements for property type, meaning most 1–4 family dwellings, FHA-approved condominiums, and PUDs qualify.^[29] Manufactured homes also qualify as long as they meet FHA standards.

Before starting the loan process for an FHA/HUD-approved reverse mortgage, applicants must take an approved counseling course.^[30] An approved counselor should help explain how reverse mortgages work, the financial and tax implications of taking out a reverse mortgage, payment options, and costs associated with a reverse mortgage.^[31] The counseling is meant to protect borrowers, although the quality of counseling has been criticized by groups such as the Consumer Financial Protection Bureau.^[1]

In a 2010 survey of elderly Americans, 48% of respondents cited financial difficulties as the primary reason for obtaining a reverse mortgage and 81% stated a desire to remain in their current homes until death.^[32]

Amount of proceeds available

The total pool of money that a borrower can receive from a HECM reverse mortgage is called the principal limit (PL), which is calculated based on the maximum claim amount (MCA), the age of the youngest borrower, the expected interest rate (EIR), and a table to PL factors published by HUD. Similar to loan-to-value (LTV) in the forward mortgage world, the principal limit is essentially the percentage of the value of the home that can be lent under the FHA HECM guidelines. Most PLs are typically in the range of 50% to 60% of the MCA, but they can sometimes be higher or lower. The table below gives examples of principal limits for various ages and EIRs and a property value of $250,000.^[33]

Options for distribution of proceeds

The money from a reverse mortgage can be distributed in four ways, based on the borrower's financial needs and goals:^[30][34]

• Lump sum in cash at settlement
• Monthly payment (loan advance) for a set number of years (term) or life (tenure)
• Line of credit (similar to a home equity line of credit)
• Some combination of the above

The adjustable-rate HECM offers all of the above payment options, but the fixed-rate HECM only offers lump sum.

The line of credit option accrues growth, meaning that whatever is available and unused on the line of credit will automatically grow larger at a compounding rate. This means that borrowers who opt for a HECM line of credit can potentially gain access to more cash over time than what they initially qualified for at origination.

The line of credit growth rate is determined by adding 1.25% to the initial interest rate (IIR), which means the line of credit will grow faster if the interest rate on the loan increases.

On 3 September 2013 HUD implemented Mortgagee Letter 2013-27, which made significant changes to the amount of proceeds that can be distributed within the first year of the loan.^[35] Because many borrowers were taking full draw lump sums (often at the encouragement of lenders) at closing and burning through the money quickly, HUD sought to protect borrowers and the viability of the HECM program by limiting the amount of proceeds that can be accessed within the first 12 months of the loan.

If the total mandatory obligations (which includes existing mortgage balances, all closing costs, delinquent federal debts, and purchase transaction costs) to be paid by the reverse mortgage are less than 60% of the principal limit, then the borrower can draw additional proceeds up to 60% of the principal limit in the first 12 months. Any remaining available proceeds can be accessed after 12 months.

If the total mandatory obligations exceed 60% of the principal limit, then the borrower can draw an additional 10% of the principal limit if available.

HECM for purchase

The Housing and Economic Recovery Act of 2008 provided HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds — the so-called HECM for Purchase^[36] program, effective January 2009. The "HECM for Purchase" applies if "the borrower is able to pay the difference between the HECM and the sales price and closing costs for the property.^[30] The program was designed to allow the elderly to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. Texas was the last state to allow for reverse mortgages for purchase.^[37][38]

Taxes and insurance

Unlike traditional forward mortgages, there are no escrow accounts in the reverse mortgage world. Property taxes and homeowners insurance are paid by the homeowner on their own, which is a requirement of the HECM program (along with the payment of other property charges such as HOA dues).^[39]

Taxability of HECM proceeds

The American Bar Association guide^[40] advises that generally,

• The Internal Revenue Service does not consider loan advances to be income.
• Annuity advances may be partially taxable.
• Interest charged is not deductible until it is actually paid, that is, at the end of the loan.
• The mortgage insurance premium is deductible on the 1040 long form.
• The money used from a reverse mortgage is not taxable.^[41]

The money received from a reverse mortgage is considered a loan advance. It therefore is not taxable and does not directly affect Social Security or Medicare benefits. However, an American Bar Association guide^[40] to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received; the borrower could lose eligibility for such public programs if total liquid assets (cash, generally) is then greater than those programs allow.^[42]

When the loan comes due

The HECM reverse mortgage is not due and payable until the last borrower (or non-borrowing spouse) dies, sells the house, or fails to live in the home for a period greater than 12 months.^[43] The loan may also become due and payable if the borrower fails to pay property taxes or homeowners insurance, lets the condition of the home significantly deteriorate, or transfers the title of the property to a non-borrower (excluding trusts that meet HUD's requirements).^[44]

Volume of loans

Home Equity Conversion Mortgages account for 90% of all reverse mortgages originated in the U.S. As of May 2010, there were 493,815 active HECM loans.^[45] As of 2006, the number of HECM mortgages that HUD is authorized to insure under the reverse mortgage law was capped at 275,000.^[46] However, through the annual appropriations acts, Congress has temporarily extended HUD's authority to insure HECMs notwithstanding the statutory limits.^[47]

Program growth in recent years has been very rapid. In fiscal year 2001, 7,781 HECM loans were originated. By the fiscal year ending in September 2008, the annual volume of HECM loans topped 112,000 representing a 1,300% increase in six years. For the fiscal year ending September 2011, loan volume had contracted in the wake of the financial crisis, but remained at over 73,000 loans that were originated and insured through the HECM program.^[48]

Since the HECM program was created analysts have expected loan volume to grow further as the U.S. population ages. In 2000, the Census Bureau estimated that 34 million of the country's 270 million residents were sixty-five years of age or older,^[49] while projecting the two totals to rise to 62 and 337 million, respectively, in 2025.^[50] In addition, the Center For Retirement Research at Boston College estimates that more than half of retirees “may be unable to maintain their standard of living in retirement.”.^[51] The low adoption rates can be partially explained by dysfunctional aspects of the reverse mortgage market, including high markups, complexity of the product, consumer distrust of reverse mortgage lenders, and lack of pricing transparency.^[52]