By Margaret Chadbourn
WASHINGTON, Sept 26 (Reuters) - American seniors grapplingwith strained savings following the deepest recession ingenerations will soon face new hurdles in tapping a tool somehave used to help finance retirement: the federal government'sreverse mortgage program.
An upcoming change in rules will cut the number of borrowerseligible to draw down cash against the value of their homes by22 percent, according to an estimate from Reverse MarketInsight, and some homeowners are rushing to beat the deadline.
"I had limited options and was up against a wall. It wasgrim," said Cheryl Honeyman, a widow living in Brookings,Oregon, who locked into a reverse mortgage this month. "I waslucky to get this loan when I did."
For the 63-year-old, who inherited her home near the Oregoncoast when her parents passed away four years ago, thegovernment-backed loan means she can live on the money she getsfrom Social Security without having to worry that an unexpectedexpense could force her to sell her home.
The program is costing the government. The Federal HousingAdministration is expected to spend $2.8 billion this fiscalyear backing reverse mortgages. Under congressional pressure,the FHA will implement new rules on Tuesday designed to stemthose losses.
The changes will limit the amount seniors can draw down,impose higher mortgage insurance fees and put in place toughervetting of applicants. But they are likely coming too late toprevent the FHA from tapping the U.S. Treasury for a cashinfusion for the first time in the agency's 79-year history.
Reverse mortgages, available to borrowers aged 62 or older,pay out a home's equity to the borrower, either in installmentsor lump-sum payments. They are repaid when the borrower dies ormoves out of the house, although the borrower must still payproperty taxes and homeowners' insurance.
The loans, most of which are insured by the FHA, have provedto be a lifeline for many Americans whose savings were depletedduring the deep 2007-2009 recession.
Honeyman was anxious that the value of her home hadsignificantly dropped during the recession and would limit howmuch money she would receive. Her home appraisal came in at$180,000 and she was able to take a $105,000 lump-sum on theproperty, which was purchased 13 years ago for $220,000.
If Honeyman had qualified for a reverse mortgage backed bythe FHA under the new rules, she would have owed more ininsurance costs and have been eligible for less money.
Loan officers and financial advisers are preparing clientsfor the upcoming shift, which they say will reduce theattractiveness of the loans for a vast number of seniors.
Deborah Nance, a reverse mortgage specialist with iReverseHome Loans in the Los Angeles area, said she worries the changeswill mainly hurt borrowers with lower incomes, heavy debtobligations or weak credit histories.
"Those that might have previously (had) a lump sum option topay off mortgages might be turned down," she said.
Nance has recommended against reverse mortgages when shehears that seniors intend to move within five years, or if theyhave family members living with them on a long-term basis.
The problem for the FHA is that an increasing percentage ofthese loans are ending up in default. A record 54,000FHA-insured reverse mortgage borrowers - or 9.4 percent - havedefaulted. That's up from 8.1 percent in July 2011.
Unlike traditional loans, the majority of defaults aretriggered when borrowers are unable to pay their property taxesor keep up with their homeowners' insurance.
PEAK AMID CRISIS?
Alba Moesser, 84, was financially independent and livingdebt-free when her son came to her with a business proposal. Shefound a way to help supply cash for the budding entrepreneurwith a reverse mortgage.
"I was able to help him rebuild an apartment complex that isnow rented out," said Moesser, who holds a Ph.D. in Hispanicliterature and hasn't yet retired.
Moesser had taken out a reverse mortgage on her Covina,California home in 2011, but she refinanced into a fresh onethis summer to come up with more cash. Under the pending rules,the amount she would have been able to take out would have beencut by about 15 percent, assuming her application made itthrough the new financial assessments.
The popularity of reverse mortgages started to rise in 2001and the volume of new FHA-backed reverse mortgages hit a peak of115,000 in 2009. That number has since declined for threestraight years, although it is expected to move higher, evenunder the tighter terms, as an increasing number of Baby Boomersretire.
By 2011, some major players, including Wells Fargo and Bankof America, stopped originating new reverse mortgage loans, inpart because the lenders believed they were becoming riskier.
"It was originally intended for those borrowers consideredhouse-rich and cash-poor. But now it is increasingly used as atool for seniors tapping equity lines for broader retirementpackages," said Stephanie Moulton, an assistant professor atOhio State University who has served as a counselor for AARP, aretired persons' trade group.
Before her loan, Honeyman said: "I was barely squeezing by."
- reverse mortgage