HUD Plans New Restrictions on Reverse Mortgages
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This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm Charlie Turner in New York. The Trump administration is planning new restrictions on reverse mortgages, which allow seniors to take out loans against the value of their homes. The Department of Housing and Urban Development says the changes are needed to help put the program on a sounder footing. Here to put this podcast on a sounder footing is Wall Street Journal reporter Laura Cusisto. Laura, first of all, what are the changes?
The two changes that are going to get people a little bit riled up are, one, that for most people, premiums are going to go up. When you first take out a reverse mortgage right now, you either pay 0.5% or 2.5% on the total amount that you're taking out, or could take out. Most people pay the 0.5%, and that's going to go up to 2%. The upfront cost of taking out these mortgages is going to go up by quite a lot. The annual premium is going to go down by a little bit, but I think that most experts think that this is going to act as a real disincentive for a lot of people to take out these mortgages. And the second is you're going to also be able to borrow less, which is also likely to make these mortgages look less appealing to people.
So, for most people, the amount that you're going to be able to borrow against your home is probably going to go down a modest amount, but certainly by about $5,000, $10,000, depending on the value of your house.
Does this apply to existing mortgages or just new mortgages?
Just new mortgages. This is very important. The Trump administration did not want little grandmas out there to have a heart attack thinking that their premiums are going to go up. So this is just if you're going to go take a mortgage out from here on in.
Let me understand something. Will new borrowers eventually see their premiums go down? I mean, does this depend on how much money they borrow?
Right now, it depends on how much money you borrow. So right now, you pay a higher premium if you borrow a lot of money up front. But this is going to change that so everybody, whether you borrow a lot or a little, is going to pay the same one. So that'll be interesting to see, too. Right now, there's sort of a disincentive for people to borrow a lot, and it might remove that disincentive. So that could be an interesting effect that we just don't know how that's going to play out. But on balance, this is supposed to reduce risk by increasing the amount people pay up front but lowering it over time.
Who are the loans insured by?
So at the very end of the day, we, the taxpayers, are on the hook. And that's been the problem with this program. It is a big money loser. There's a lot of risks built into the program because it ends up costing the federal government money if people live longer than is expected, if home values don't increase by as much as expected.
What changes is HUD proposing for reverse mortgage premiums and who will pay more upfront?
if they don't take care of the home as much. You know, if you're getting into your 90s and you're not getting that roof repaired or that bathroom upgraded. All of these variables that are really hard to predict. And so, what ends up happening is that the federal government, which backstops the loan, sometimes, you know, then ends up taking out a reserve fund. And once, so far only once, they ran out of funds in that reserve fund and had to get an appropriation from Treasury.
I'm speaking with Laura Cusisto of The Wall Street Journal. You're listening to Your Money Matters. Thanks for listening, everyone. Laura, this reserve fund, how in debt is it right now?
This is why we care about it. Basically, what happens is that both reverse mortgage borrowers, but also regular mortgage borrowers who tend to be younger, FHA tends to cater to a somewhat lower, middle-income, younger borrower. Those premiums are being paid into this reserve fund. We're really at the point where the risks that the reverse mortgage poses are going to exceed the amount in that reserve fund over the next couple of years, which means Congress would have to step in.
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