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The Federal Housing Administration (FHA) is developing a new reverse mortgage product that sharply cuts up-front payments by home owners but also significantly reduces the percentage of a home’s equity that can be paid to owners under the program. Reverse mortgages insured by the government are available on homes where the youngest owner is at least 62 years old. The program is called a Home Equity Conversion Mortgage (HECM).

Many consumer advocates have been opposed to reverse mortgages, in part because they carry stiff fees to consumers. They also have been controversial because of high-pressure marketing tactics that led some borrowers to use loan proceeds for inappropriate investments. Most experts advice older consumers to use a reverse mortgage only when they need funds for living expenses and other necessities.

Details of the new product were outlined in a press release from an industry group, the National Reverse Mortgage Lenders Association (NRMLA). It said the FHA had already approved the changes. A government spokesman, however, said the changes were not yet final. “There has been no official announcement yet because we are still working out the details,” said spokesman Lemar Wooley.

In lowering one of the major sources of high reverse mortgage fees, the FHA would also limit its own losses. Even with insurance payments set at two percent of a home’s value, the government has been losing money on the program. The NRMLA release said that under the new HECM loan, to be called the “HECM Saver” loan, the two percent payment will be effectively eliminated. The downside is that homeowners will be able to draw down 10 to 18 percent less money from their home’s equity than under the current HECM loan rules. By paying out a smaller percentage of a home’s equity, the FHA says, it will be able to sharply reduce losses on the program, and thus not need to collect thousands of dollars in up-front insurance premiums.

The new HECM Saver loan will be offered in October, the news release said. It said the current loan, to be called a “HECM Standard” loan, would continue to be available.

Under a reverse mortgage, consumers can access a percentage of their home’s equity. The percent depends on their age and other variables. They use these funds to first pay off any existing mortgage on the home. They then can take the remaining money in a lump sum, spread it over monthly payments, or have a line of credit (guaranteed by the government) that they can draw down as needed. They need make no further mortgagepayments and can live in the home as long as they’re able. They must continue to pay any taxes and home insurance, and maintain the property.

When home owners leave the house or die, any remaining equity in the home can be passed on to their heirs. If they’ve carried a reverse mortgage for a long time, it’s likely the lender would have earned loan payments exceeding the equity of the home. Because HECM loans are what’s called “non recourse” loans, there is no financial obligation to the home owners or their heirs should loan charges exceed the value of the property.

“The upfront mortgage insurance premium has been a deterrent to some prospective borrowers, particularly those needing less than the full amount available under the traditional HECM Standard program,” said Peter Bell, NRMLA president. “This new variation, the HECM Saver, presents a sensitive response to their needs.”

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Up-front real estate payments could soon be reduced for many home-buyers with the aid of a reverse mortgage product being prepared by the Federal Housing Administration (FHA).

Real estate will be easier to buy with these new reverse mortgages, but they also reduce the percentage of the home’s equity due to the new owners.

The new Home Equity Conversion Mortgage (HECM) will be available on homes where the youngest owner is over 63 years old. The HFA has already approved the real estate package and are now preparing the product for the market, according to the National Reverse Mortgage Lenders Association.

New homeowners taking out the HECM Saver will be able to draw down 10% to 18% less from their home’s equity under this real estate product, but the 2% insurance payment will be eliminated.

With reverse mortgages homeowners can get access to some of the equity in their home. Using these funds to pay off mortgages. The NRMLA says the HECM Saver will be introduced in October.

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FOR many baby boomers, retirement will be a financial juggling act. Without the backing of compulsory superannuation contributions throughout their working life, many may consider a reverse mortgage as a source of additional retirement income.

A reverse mortgage provides an opportunity to access home equity, with the loan secured by your home. There are no repayments necessary until you 1) sell up, or 2)die – in which case the loan is repaid out of your estate.

You can choose to receive the cash from a reverse mortgage as a regular series of payments, a lump sum or a combination of both. A lump sum payment may be counted in the Centrelink assets test, so it could reduce your age pension entitlements.

To be eligible for a reverse mortgage you generally need to be aged 60-plus, and it’s essential to own your home. You can usually borrow between 15% and 40% of the value of your home depending on your age. The older you are, the more you can borrow.

A reverse mortgage is an appealing way to tap into home equity, but these loans don’t come cheap. The interest rate and fees are often higher than those of a regular mortgage.

As a guide, the Commonwealth Bank charges an upfront fee of $950 plus interest of 8.46% for its reverse mortgage, which is only available to over-65s. St George Bank’s Seniors Access Loan (available if you’re aged over 63) charges 8.43% with an upfront loan fee of $950.

This is important because the interest on the loan builds from day one. The younger you are when you take out the loan, the less you’ll have in home equity as time goes by – more so if home values rise slowly.

For instance, let’s say a retiree owning a home worth $400,000 takes out a reverse mortgage for just $50,000 at age 65.  We’ll also assume that the loan rate is 8.5%, the monthly fees are $12 (about the current average) and the upfront fee is $900. If the property grows in value by 4% each year, by the time the home owner is aged in his mid-80s, the home will be worth around $871,000 and the loan will have grown to about $248,000.

This may not seem like such a bad deal – after all, there’s still plenty of home equity left to draw on. The problem is that it’s in later life that we often have to fund aged care accommodation, and this can be very expensive. Once you’ve exhausted your home’s value, there may not be much else to turn to.

Reverse mortgages are certainly an option for cash-strapped retirees to consider. And if you’re worried about leaving less to the kids, think again.  I’m sure no adult child would begrudge their parent a decent retirement even if it means leaving a smaller estate.

Nonetheless it’s important to be aware of the long term effects of using a reverse mortgage at an early stage of retirement. A good starting point for information is the consumer website of investment watchdog ASIC. The website at www.fido.gov.au provides a free booklet on reverse mortgages plus a handy online calculator that shows how the loan can impact your home equity over time.

Whatever you do, don’t sign up for a reverse mortgage without getting independent professional advice from your accountant or lawyer.

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Janet Bush began looking into reverse mortgages about 15 years ago when money became a little tight. Though she didn’t apply for the loan back then, she kept it in the back of her mind as a financial option.

Two months ago, Bush decided to take out a reverse mortgage home equity line of credit on her 3,000-square-foot farmhouse in Victor. A piano teacher who enjoys being independent, the line of credit offers her the option “to draw on it if I need it,” said Bush, 82.

Is a reverse mortgage right for you? A reverse mortgage allows individuals to borrow against the equity they have established in their home. Instead of making monthly payments, as with a typical mortgage, the borrower of a reverse mortgage can choose to receive monthly payments, take a lump sum or establish a line of credit to draw on.

“It can make your golden years a little more golden,” said Matt McAfee, sales manager for reverse mortgage at M&T Bank.

A reverse mortgage could provide an additional income source for those who qualify, McAfee said.

There are restrictions to a home equity loan, said Duncan O’Dwyer, partner at Forsyth, Howe, O’Dwyer, Kalb & Murphy in Rochester. To be eligible for a reverse mortgage loan, the borrower and any other owners of the home must be 62 or older, live in the home as their principal residence and not be delinquent on any federal debt, O’Dwyer said. The home must be free and clear or have a remaining mortgage balance that can be paid off by the reverse mortgage.

Townhomes, detached homes, condominium units, homes that are part of a planned unit development and some manufactured homes are eligible. However, cooperatives and most mobile homes are not eligible, O’Dwyer said.

The home must also meet the U.S. Department of Housing and Urban Development’s minimum property standards, though the owner can use a reverse mortgage to pay for repairs that may be required.

The amount that can be taken out against the home is based on the current interest rateand the home’s value, McAfee said. The loans are Federal Housing Authority-insured, which means that if the homeowner outlives the loan amount, FHA absorbs that risk. But if there is equity left, the selected beneficiaries may keep the equity left after paying off the loan.

There is also a reverse mortgage available for new purchases if a homeowner decides to swap his or her principal residence, McAfee said.

One of the misconceptions about reverse mortgage loans is that only the needy use them, O’Dwyer said. But some seniors choose to take the loan when they need to get out of debt while others do it for financial planning reasons.

Some seniors will find themselves in the situation of being house-rich and cash-poor, and a reverse mortgage could help seniors live better in their retirement years, McAfee said.

But reverse mortgages have a fairly substantial upfront cost. Such mortgages make sense if the homeowner plans to stay in the home for a while, McAfee said. If the borrower plans to move in a year or two, taking out the loan may not be the right move, he said.

Given the three ways to access a reverse mortgage — a lump sum, monthly payments or a line of credit — most M&T customers choose the lump sum or the line-of-credit option, McAfee said.

For Bush, the line of credit gave her the money to take on the landscaping project that she had put off for financial reasons.

While she has five children, “I educated them all to be independent,” Bush said.

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The Federal Reserve and other top regulators said on Monday reverse mortgages pose “compliance and reputation risks” for lenders, and offered guidance to financial firms on how to avoid such pitfalls.

The Fed said reverse mortgages, which enable borrowers to get a monthly income stream by surrendering a portion of the equity in their homes, are likely to become increasingly popular given an expected rise in the elderly population.

The guidance puts no limits on fees that can be charged for reverse mortgages.

“Reverse mortgages present substantial risks both to institutions and to consumers, and, as with any type of loan that is secured by a consumer’s home, it is crucial that consumers understand the terms of the product and the nature of their obligations,” the regulators said in a statement.

“Lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves,” they said.

Supervisors said they want to ensure that lenders determine whether or not borrowers are able to continue paying insurance and taxes on the property, and avoid conflicts of interest by lenders trying to bundle the loans with other products.

“Consumers are not always adequately informed that reverse mortgages are loans that must be repaid (and not merely ways to access home equity),” the agencies said.

“In fact, some marketing material has prominently stated that the consumer is not incurring a mortgage, even though the fine print states otherwise.”

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