Reverse Mortgages May Cost You More

If you've been thinking about getting a reverse mortgage or home equity conversion mortgage (HECM), you need to know what Fannie Mae's been up to.

Decision-makers at Fannie Mae have been tinkering under the hood of the reverse mortgage industry. They've made some changes recently that are intended to improve the situation for cash-poor, equity-rich seniors. Critics warn, however, that those changes may backfire and leave seniors with fewer options than before.

Seniors strapped for cash

Now more than ever, seniors are finding themselves without the resources necessary to retire. The stock market freefall of 2008 and early 2009 sapped the value of investment accounts around the world. For elderly investors, it's been a particularly rough ride-they don't have the luxury of being able to wait out the storm.  

Having too little cash in those golden years is a situation that could be appropriately addressed with a properly planned reverse mortgage. The problem is, Fannie Mae has recently implemented changes that impact how much help a reverse mortgage can provide.  The mortgage company has eliminated the practice of locking in reverse mortgage rates in advance, and it's allowing lenders to make more money on each deal. Either change alone could translate to lower loan amounts for seniors, some of whom can hardly afford the cutback.

These changes impact FHA-insured HECMs, the most common form of reverse mortgage.

An industry in need of new money

Fannie Mae argues that the changes are necessary to attract new money into the reverse mortgage industry. With the recent problems in the credit markets, secondary market demand for reverse mortgages has essentially shut down. As a result, Fannie Mae is really the only major secondary market player out there. The belief is that attracting new secondary market buyers will increase funding and eventually pull reverse mortgage rates down.

A gamble in the here-and-now

Some reverse mortgage specialists don't agree with Fannie Mae's logic. From their perspective, the changes have two potentially damaging consequences:

• Homeowners won't know how much money they'll get until shortly before closing. The cash amount available to a homeowner through a reverse mortgage is based on the home equity value, the homeowner's age, and the interest rate. Because reverse mortgage rates aren't set until closing, homeowners have to wait until they're at the closing table to know how much the reverse mortgage is worth to them. Given that reverse mortgages and HECMs are largely used as financial planning tools, this complication seems counterproductive.  Who can plan without knowing the details?

• Homeowners will pay more for their reverse mortgages due to higher reverse mortgage rates. Paying more for a reverse mortgage translates into getting less money out of the deal. This is problematic for seniors who need every penny to survive.

Does this mean HECMs under the new rules are nothing more than reverse mortgage lemons? It's too soon to tell, but hopefully, Fannie's plan will work and seniors will come out ahead in the end.