New Reverse Mortgage Rules Go into Effect

By Ronald A. Fatoullah, Esq., Elizabeth Forspan, Esq. and Aaron Moss

{3:26 minutes to read} On April 27th, the new rule requiring a financial assessment as part of any reverse mortgage application went into effect. The Department of Housing and Urban Development (HUD) had originally announced the rules in September 2013.

As part of the financial assessment, the mortgagee (i.e. the bank) must analyze the mortgagor's (borrower's) ability to pay the expenses he will incur during the period of the mortgage. The mortgagee should look at a number of factors, including, but not limited to, the borrower's credit history, income, benefits, and assets. If the credit history is troublesome, mortgagees should consider whether there are "extenuating circumstances" that caused the financial problems. Some examples given by HUD include the loss of income due to the death of a spouse, unemployment, or emergency medical hospitalization.

In the event that the mortgagee determines the mortgagor lacks the ability to meet his financial responsibilities, the mortgagee must establish a Life Expectancy Set-Aside. This would guarantee that there is money available to pay the bills and thereby avoid default. Alternatively, the mortgagee may authorize the mortgagor to pay the property charges from the mortgage proceeds by withholding the funds from the monthly payment due the mortgagor or by charging the funds to the line of credit.

In the Courier Senior December 2014 Edition, we presented the pros and cons of obtaining a reverse mortgage. Available to anyone age 62 and over, a reverse mortgage enables a homeowner to cash out the equity on his/her residence, provided that he has paid off most, or all, of his traditional mortgage. In the event that too large a percentage is still owed on the traditional mortgage, the homeowner will be required to use some of the proceeds from the reverse mortgage to repay it. One of the benefits of a reverse mortgage is that there are no monthly payments. Instead, the loan is repaid when the home is sold, when the borrower dies, or when the borrower fails to live in the home for 12 consecutive months. Even though there are no monthly payments on a reverse mortgage, the homeowner remains responsible for property taxes, insurance, and maintenance. As a result, according to the Department of Housing and Urban Development (HUD), 9.8% of reverse mortgages are in default.

Reverse mortgages can certainly be a useful tool when used appropriately. Unfortunately, many homeowners have had trouble paying for the other assorted expenses and have ended up in default. Hopefully, the new financial assessment requirement from HUD will be helpful in preventing homeowners from obtaining unsuitable reverse mortgages.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Elizabeth Forspan, Esq. is the managing attorney at the firm. Aaron Moss, a summer associate with the firm, attends the University of Maryland School of Law, where he is an Associate Editor of the Maryland Law Review. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also the co-founder of JR Wealth Advisors, LLC. The Wealth Management Firm can be reached at 516-466-3300 or 800-353-3775.