With last week’s passage of Assembly Bill 329, California officially became the first state to legislate changes in the reverse mortgage industry. Most other states still lack comprehensive reverse mortgage regulation, such that burden of oversight falls on the Federal Government (via the FHA).

While the law that was ultimately passed represents a watered-down version of the original bill (thanks in no small part to lobbying efforts by the National Reverse Mortgage Lenders Association), and hence doesn’t impose many new restrictions. Namely, it seeks to crack down on “cross-selling” of annuities and insurance products with reverse mortgages, and increase counseling requirements for new borrowers.

The former aim is pretty straightforward. One of the biggest criticisms of reverse mortgages is that they are often paired with annuities by lenders looking to make additional profits. However, since reverse mortgages are inherently structured to give the borrower the option of withdrawing the loan balance in an annual payment, there is little advantage of this annuity. In fact, the California law prohibits lenders from altering the annual payout due to interest rate changes, and imposes steep penalties on those who do. In this, the “annuity option” is preserved.

The counseling requirement, meanwhile, aims to redress the problem that many borrowers were being pressured into reverse mortgages without a thorough understanding of the product’s terms and mechanics. Towards this end, the California law requires lenders to furnish a list of non-profit counseling agencies, so that the borrower can complete a mandatory session prior to obtaining the mortgage. At this counseling session, a written checklist must be signed, that discusses the following topics:

(A) How unexpected medical or other events that cause the prospective borrower to move out of the home, either permanently or for more than one year, earlier than anticipated will impact the total annual loan cost of the mortgage.

(B) The extent to which the prospective borrower’s financial needs would be better met by options other than a reverse mortgage, including, but not limited to, less costly home equity lines of credit, property tax deferral programs, or governmental aid programs.

(C) Whether the prospective borrower intends to use the proceeds of the reverse mortgage to purchase an annuity or other insurance products and the consequences of doing so.

(D) The effect of repayment of the loan on nonborrowing residents of the home after all borrowers have died or permanently left the home.

(E) The prospective borrower’s ability to finance routine or catastrophic home repairs, especially if maintenance is a factor that may determine when the mortgage becomes payable.

(F) The impact that the reverse mortgage may have on the prospective borrower’s tax obligations, eligibility for government assistance programs, and the effect that losing equity in the home will have on the borrower’s estate and heirs.

(G) The ability of the borrower to finance alternative living accommodations, such as assisted living or long-term care nursing home registry, after the borrower’s equity is depleted.

I think last point is particularly important, since reverse mortgages may inadvertently deprive themselves of “outs” in their twilight years. In other words, well many elderly borrowers would like to remain in their homes for the remainder of their lives, we all know that the reality is otherwise. In other words, it’s important for seniors with reverse mortgages to set aside additional cash, as the equity in their homes dwindles to zero over the term of the mortgage.

5 Responses to “California Becomes First State to Clamp Down on Reverse Mortgages”

  1. Jaron Says:

    Regarding the last point:

    The ability of the borrower to finance alternative living accommodations, such as assisted living or long-term care nursing home registry, after the borrower’s equity is depleted.

    What if a senior used a small portion of the proceeds to buy a life insurance policy that has a Long Term Care rider attached to it. Wouldn’t that ease the problem of the senior needing money for assisted living expenses?


  2. Shirley Bell Says:

    Re: Wells Fargo Reverse Mortgage
    Individual bought reverse mortgage. Then she put her home is a valid Trust. Then she died. Successor Trustee is selling home (in escrow, ready to close) Wells Fargo will not give payoff instructions! Claims successor trustee has no authority for information. They are suggesting this go to Probate for authority. Wells Fargo has shorten payoff from 12 months to 4 months and then will start Foreclosure process! Any suggestions?

  3. Arizona Passes Reverse Mortgage Legislation. Good or Bad for Borrowers: You Decide. Says:

    […] week, Arizona became the second state (after California) to pass legislation governing reverse mortgages. The legislation is a hot topic of discussion on […]

  4. Elizabeth Whiting Says:

    My great uncle died leaving a trust and trustee to handle his reverse mortgage as well as his sizable estate. Now his daughter and granddaughter, who are not trustees, have move into the home and is trying to prevent it from being sold?

  5. Karen Says:

    I find that my father ((deceased) signed a reverse mortgage in 1992 that in addition to a fixed rate of interest, provides for an annual increase in the principal equal to the increase in the fair market value. Usury? Eliminated the possibility of any equity in the home. Also, the P&I is due and payable 60 days after permanent move by my mother, now in a assisted living residence.

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