Two important additional consumer safeguards came into full effect in 2015. The first relates to new protections for nonborrowing spouses who don’t meet the minimum age requirement of sixty-two. In the past, when one spouse was too young, the solution was typically to remove that spouse from the house title. This created a problem when the borrowing spouse died first and the loan balance became due. Without sufficient liquidity or the ability to refinance, the nonborrowing spouse could be forced out of the home.
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HUD implemented safeguards for nonborrowing spouses in 2014 and further clarified them the following year. As of spring 2015, eligible nonborrowing spouses now have the right to stay in the home after the borrower dies or leaves, as the loan balance no longer needs to be paid until after the nonborrowing spouse has also left the home. In order to do this, the nonborrowing spouse must have been the spouse when the loan was closed, must be named as a nonborrowing spouse, and must continue to occupy the property as a primary residence and maintain the usual taxes, insurance, and home upkeep. These protections apply for loans made after August 2014.
To be clear, while nonborrowing spouses may stay in the home, they are not borrowers. Once the borrower has left the home, there is no further ability to spend from the line of credit, and any term or tenure payments stop. However, interest and mortgage-insurance premiums continue to accrue on any outstanding loan balance. The existing rules contain an important caveat: should the borrower move to an institution such as a nursing home for at least twelve months, the loan may become due even if the nonborrowing spouse remains in the home.
The principal limit factors (PLFs) published on August 4, 2014, accounted for nonborrowing spouses. PLFs are now provided for ages eighteen and older to account for nonborrowing spouses who are significantly younger than the borrower. Before these changes, PLFs were only needed for ages sixty-two and older. The PLF is based on the younger of the borrower and eligible nonborrowing spouse.
Though nonborrowing spouses cannot spend from the reverse mortgage, they may remain in the home for many more years, so initial HECM proceeds must be lowered to protect against loan balances exceeding the home’s value. Aside from the expansion to account for nonborrowing spouses, the August 2014 PLFs underwent further downward revisions to limit the initial available credit amount in order to ensure that mortgage-insurance premiums could cover the risk of loan balances exceeding the home’s value.
The other new consumer safeguard implemented in 2014 and effective in 2015 is a more detailed financial assessment for potential borrowers to ensure that they have sufficient means to pay property taxes, homeowner’s insurance, maintenance and upkeep, and homeowner’s-association dues. Determination that a potential borrower will struggle to meet these obligations with assets from outside home equity does not disqualify them from receiving a HECM. Life expectancy set-asides (LESAs) can now be carved out of the line of credit to cover these expenses. Interest on these set-asides does not accrue until the money is spent, but the set-asides prevent borrowers from taking too much from the line of credit and becoming unable to meet the terms required to stay in the home. These new set-asides grow at the effective rate, not the expected rate used for earlier set-asides. This was done to clarify earlier confusion created when set-asides grew at a different rate than everything else.
Concerns should be raised about the viability of an overall retirement-income plan when it is necessary to create large set-asides within the line of credit in order to make it work. In some cases, a reverse mortgage might simply be a source of liquidity to cover expenses and allow the borrower to stay in the home while using other limited resources to cover retirement-living expenses.
More recently, on August 29, 2017, HUD announced a series of new changes to the HECM program parameters that subsequently went into effect for new HECM applications made after October 2, 2017. In short, a few of these new rules include:
· The initial mortgage-insurance premium when opening a reverse mortgage is now 2 percent of the home value, up to the $679,650 lending limit. This has changed from a previous dual strategy that depended on the amount borrowed in the first year.
· The ongoing mortgage-insurance premium on the loan balance has been reduced to 0.5 percent from the previous 1.25 percent.
· A new table of principal limit factors was issued; these generally result in a reduced initial borrowing amount with the reverse mortgage, at least when interest rates are low.
· The floor on the expected rate used to calculate initial borrowing amounts on a reverse mortgage was reduced from 5.06 percent to 3 percent, which does have some interesting implications in our low-interest-rate environment.
A final recent change issued on September 19, 2017, was to begin allowing nonborrowers to remain on the home title. In the past, only borrowers could remain on the home title. Eligible nonborrowing spouses received protections to be able to stay in the home, but they could not be on the home title. Now they can, as can any other homeowners, such as siblings or children of the borrower. This creates a new category of ineligible nonborrowers that can remain on the home title today. Any homeowners that wish to remain on the home title must also go through the reverse-mortgage counseling session and sign some loan documents as part of the borrower’s application process. Since these ineligible nonborrowers do not have protections to stay in the home, their ages are not relevant for determining the initial principal limit. It is still determined based on the youngest of the borrowers or eligible nonborrowing spouses.