Under the Responsible Lending Laws, the National Consumer Credit Protection Act was amended in 2012 to incorporate a high level of regulation for reverse mortgage.
Reverse mortgages are also regulated by the Australian Securities and Investments Commission (ASIC) requiring high compliance and disclosure from lenders and advisers to all borrowers.
[10] Since the update of the National Consumer Credit Protection Act in September 2012, new reverse mortgage loans are not allowed to have fixed rates.
[citation needed] A common misconception is that when the borrower dies or leaves the home (e.g., goes to an aged-care facility or moves somewhere else) the house must be sold.
[10] Under the National Credit Code, penalties for early repayment are illegal on new loans since September 2012; however, a bank may charge a reasonable administration fee for preparation of the discharge of mortgage.
This means that if the balance of the loan exceeds the proceeds of sale of the property, no claim for this excess will be made against the estate or other beneficiaries of the borrower.
In a reverse mortgage begun before 18 September 2012, the contract specifies whether the borrower is protected when the loan balance ends up being more than the value of the property.
[16] The FHA-insured Home Equity Conversion Mortgage, or HECM, was signed into law on February 5, 1988, by President Ronald Reagan as part of the Housing and Community Development Act of 1987.
The retired population normally does not have the same level of income to afford increases in taxes and insurance as individuals with a traditional mortgage.
[4] The FBI, Inspector General, and HUD urge American consumers, especially senior citizens, to be cautious when considering reverse mortgages to avoid scams.
If this younger spouse was unable to pay off or refinance the reverse mortgage balance, he or she was forced either to sell the home or lose it to foreclosure.
This often created a significant hardship for spouses of deceased HECM mortgagors, so FHA revised the eligibility requirements in Mortgagee Letter 2014-07.
The HECM reverse mortgage follows the standard FHA eligibility requirements for property type, meaning most 1–4 family dwellings, FHA-approved condominiums, and PUDs qualify.
[1] In a 2010 survey of elderly Americans, 48% of respondents cited financial difficulties as the primary reason for obtaining a reverse mortgage and 81% stated a desire to remain in their current homes until death.
[32] The total pool of money that a borrower can receive from a HECM reverse mortgage is called the principal limit (PL), which is calculated based on the maximum claim amount (MCA), the age of the youngest borrower, the expected interest rate (EIR), and a table to PL factors published by HUD.
Similar to loan-to-value (LTV) in the forward mortgage world, the principal limit is essentially the percentage of the value of the home that can be lent under the FHA HECM guidelines.
This means that borrowers who opt for a HECM line of credit can potentially gain access to more cash over time than what they initially qualified for at origination.
On 3 September 2013 HUD implemented Mortgagee Letter 2013-27, which made significant changes to the amount of proceeds that can be distributed within the first year of the loan.
If the total mandatory obligations (which includes existing mortgage balances, all closing costs, delinquent federal debts, and purchase transaction costs) to be paid by the reverse mortgage are less than 60% of the principal limit, then the borrower can draw additional proceeds up to 60% of the principal limit in the first 12 months.
[30] The program was designed to allow the elderly to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing.
A LESA carves out a portion of the reverse mortgage benefit amount for the payment of property taxes and insurance for the borrower's expected remaining life span.
The American Bar Association guide[40] advises that generally, The money received from a reverse mortgage is considered a loan advance.
However, an American Bar Association guide[40] to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.)
[42] The HECM reverse mortgage is not due and payable until the last borrower (or non-borrowing spouse) dies, sells the house, or fails to live in the home for a period greater than 12 months.
[46] However, through the annual appropriations acts, Congress has temporarily extended HUD's authority to insure HECMs notwithstanding the statutory limits.
[50] In addition, the Center For Retirement Research at Boston College estimates that more than half of retirees “may be unable to maintain their standard of living in retirement.”.
Besides providing liquidity to the banks by securitization, HKMC can offer guarantee of reverse mortgage principals up to a certain percentage of the loan value.
In terms of the use of proceed, applicants are allowed to make one-off withdrawal to pay for property maintenance, medical and legal costs, in addition to the monthly payout.
However, social stigma associated with not preserving real estate for inheritance has prevented reverse mortgages from widespread adoption.