A quiet, but important change in reverse mortgages goes into effect today. In one foul swoop, the Federal Department of Housing and Urban Development (HUD) slashed principal limits on all reverse mortgages by more than 10% in some cases. In other words, the total amount that you can borrow using a reverse mortgage (home equity conversion loan) is now 10% less than it was yesterday.

It’s unclear exactly what motivated the change. Government officials and policymakers have long been mulling changes to the regulatory structure of reverse mortgages, due to claims of abuse and concerns that they aren’t appropriate for certain borrowers. This particular change may also have stemmed from fears that if housing prices decline further, many reverse mortgages could soon go underwater, leaving HUD (and taxpayers, indirectly) on the hook for Billions of Dollars.

Naturally, industry insiders are furious. How dare you deprive seniors of their deserved cash, they argue. Of course, it’s not the sense of mortgage injustice that bothers them so much as the potential affect on business. It turns out that an overwhelming majority of reverse mortgage borrowers have existing liens (i.e. primary mortgages) on their home, and use a large portion of the proceeds from the reverse mortgage to retire these liens. Research also shows that most of these borrowers remain unwilling to divert cash from other sources (i.e. savings accounts), which means the HUD-mandated principal decline could ultimately dissuade them from taking out a reverse mortgage. It doesn’t help that many reverse mortgage borrowers have particular tenuous financial situations, such that after this kind of change, a reverse mortgage simply wouldn’t be viable.

The precise principal limits can be found in this table, recently released by HUD. Based on the age of the borrower and interest rate offered under the reverse mortgage. it computes a percentage of the value of the collateral (one’s home) which can be tapped into. A borrower over the age of 98 with an interest rate under 5.5% can withdraw 81% of the value of their home, while a borrower aged 62 paying an interest rate of 19% would be eligible to withdraw a paltry 5% Hardly worth it in that case.

The calculations are based on certain actuarial assumptions regarding life expectancy and house price appreciation, and represent the maximum borrowing amount as stipulated by HUD. For potential borrowers who just can’t make a reverse mortgage work for them under the current limits, the recommended course of action is to wait for housing prices to rise again, continue to pay down your mortgage and/or simply wait until you’re older. Based on the table, you can see that every additional year you wait, you will be entitled to an additional .7% of the value of your home. For a $250,000 a home, that’s an additional $1,750 just for waiting a year! Not bad.

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