New Law Protects Senior Borrowers

Reining in Fees and Fraud Associated with Reverse Mortgages

Sep 14, 2014
The Housing and Economic Recovery Act of 2008 contains a provision intended to help seniors by reining in fees and fraud associated with reverse mortgages. Reverse mortgages were created largely for seniors who are cash-poor and house-rich - meaning they have a lot of equity in their homes but little or no savings. This type of loan allows homeowners 62 or older to borrow against their equity. But unlike traditional home loan products, no payment is due on a reverse mortgage until the homeowner moves, sells or dies.

The maximum a senior will be able to borrow through a reverse mortgage is $417,000 (or $625,000 in a high housing cost area). The range now is $200,160 to $362,790. Most important, the law reduces fees. It cuts the origination fee to 2 percent of the first $200,000 borrowed and 1 percent for any amount after that. The maximum origination fee can't exceed $6,000. Except for title insurance, hazard, flood or other such products, lenders are prohibited from requiring borrowers to purchase insurance, annuities or other similar products as a condition of getting a reverse mortgage.

Part of the reason the housing act included a provision for reverse mortgages was out of concern that seniors were inappropriately - and sometimes fraudulently - being sold other financial products. In some cases, seniors have been encouraged to use the proceeds of their reverse mortgages to buy annuities or long-term care insurance. Although only 1 percent of older households have reverse mortgages, the market has grown in recent years, increasing from 6,600 loans in 2000 to 107,000 in 2007, according to research by AARP's Public Policy Institute.

Still, the high fees scare off many borrowers. The fees and costs associated with reverse mortgages are often significantly higher than traditional home-loan products - sometimes as high as 4 percent to 8 percent of the loan amount. The housing act requires the government to conduct a study to look into the costs associated with reverse mortgages.

For more information about reverse mortgages, try these Web sites:
HUD's site at
National Reverse Mortgage Lenders Association's reverse mortgage calculator at The calculator will give you an estimate of the fees you may be charged. Be sure to click on the link for "loan summary" after your calculation.

Contact Michelle Singletary, a personal finance columnist at The Washington Post, at [email protected].

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