Consumers may benefit from the Department of Housing and Urban Development’s (HUD)’s changes to its reverse mortgage borrowing guidelines. Helping consumers was not the intent; HUD only changed the guidelines to reduce the defaults that have swamped the agency the past several years. But, the changes are still increasing protections for homeowners by making reverse mortgages more difficult to get.
The new rules require reverse mortgage borrowers to now pay an up-front insurance fee of 2 percent of their loan, as opposed to the former 0.5 percent new borrowers were offered. Also, borrowers will only be able to borrow 58 percent of their home’s equity, as opposed to the 64 percent they were previously able to borrow. Translation: Potential borrowers will find reverse mortgages less enticing, which is a good thing.
Reverse mortgages are in almost every circumstance a poor mechanism for conserving family wealth. The idea behind a reverse mortgage is that it is given to seniors who want to stay in their homes for the remainder of their days. In exchange for giving up the equity in their homes that they have built up over years, seniors receive cash to allow them to live more easily for the remainder of their days. Reverse mortgage lenders recognize that baby boomers are aging out with billions of dollars in equity in their homes. It is those billions that the mortgage industry wants to get its hands on.
Proponents of reverse mortgages will argue that if a reverse mortgage can guarantee that a homeowner will live in their home until the day they die and will provide that homeowner with tens of thousands, or even hundreds of thousands of dollars in exchange for giving up equity in their home, why shouldn’t they accept such a seemingly sweet deal? The obvious answer is that seniors are giving up a huge safety net of home equity that they would otherwise have. But there is a new reason why reverse mortgages are harmful: the proposed tax reforms may leave seniors unable to cover expenses even after giving up equity.
The elderly who have signed reverse mortgages are going to get hammered. Five years ago, for example, if grandparents had $300,000 in equity in their home and then received $200,000 in a reverse mortgage, they would have been okay. Although they still had to pay their property taxes, they were able to deduct the entire amount of those taxes from their federal income tax. Today is another matter. The congressional tax reform legislation caps at $10,000 the maximum deduction individuals can declare in state and local income and property taxes. Overnight the real property tax costs for those same grandparents may jump significantly. And it won’t just be grandparents affected. Many homeowners of all ages in high-tax states like New York, New Jersey and California may find themselves donating more to the IRS.
The pot of money those elderly grandparents had been surviving on may get much smaller. Now they will have to dip into other parts of their finances to make up the difference. According to data obtained from HUD through a Freedom of Information Act request, the California Reinvestment Coalition (CRC) reports that in 2016 reverse mortgage foreclosures jumped 646 percent in comparison to the previous seven years. If foreclosures jumped 646 percent in 2016, imagine the reverse mortgage foreclosure impact of the tax law changes.
Thus, it is important to remember that although reverse mortgages put money in borrower’s hands immediately, there’s a heavy price for it. And, new tax laws may reduce the perceived benefit, thus leaving seniors in a much worse position. Reverse mortgages may be a tool that is appropriate sometimes, but it should be considered a last resort. And if a borrower is unfamiliar with reverse mortgages, the person to trust is a legal expert, not Henry Winkler or the late Fred Thompson. Celebrity endorsements mean nothing. Men like Fonzie and elder statesman actor Thompson are mechanisms to make the lending industry rich. Save your equity. Avoid reverse mortgages.
Joshua Denbeaux, Esq is a Westwood, N.J. attorney who focuses on financial rights for consumers and business owners, specializing in real estate disputes such as foreclosure and loan servicing.