Applying for reverse mortgages will get tougher

But during the recession and mortgage bust years, thousands of borrowers fell into default because they didn't pay their required property taxes and hazard insurance premiums. On top of that, real estate values plunged, producing huge losses on defaulted and foreclosed properties for the FHA. The losses got so severe that the Treasury Department had to provide the FHA with a $1.7-billion bailout in 2013, the first since the agency was created in the 1930s.

All of this led to the dramatic changes coming April 27. Applicants are now going to need to demonstrate upfront that they have both the willingness and the capacity to meet their obligations. Reverse mortgage lenders are going to pull borrowers' credit reports from the national credit bureaus, just as they do with other mortgages.

Applicants are going to have to show that they paid their real estate taxes, homeowner association fees and other property-related charges on time for at least the last 24 months. They will be asked to produce documentation of their employment status (if they're still working), income and financial assets, as well as undergo a "residual income" analysis that examines all their monthly expenses and cash flow.

If they get inadequate marks on these tests, they may be required to create a "life expectancy set-aside" — essentially a reserve account or escrow funded wholly or in part from their loan proceeds. For some borrowers, the set-asides may be so substantial they'll be left with minimal cash at closing, making the entire reverse mortgage process a waste of effort.

The changes, say reverse mortgage industry experts, will exclude potentially thousands of older homeowners from obtaining a reverse mortgage, especially those who are on the margins economically and need the cash to help pay for ongoing household expenses.

Reza Jahangiri, chief executive of American Advisors Group, the highest-volume reverse mortgage lender, said his company expects a decline in loan activity of 8% to 10% after the financial assessment rules take effect. He also expects a countervailing shift toward "mainstream" borrowers who seek to use a reverse mortgage as part of their overall retirement financial planning, including raising money to purchase a new house or to establish a flexible line of credit they can draw from as needed.

source: http://www.latimes.com/business/realestate/la-fi-harney-20150412-story.html