New housing law adds needed protections for seniors seeking reverse mortgages

There's a lot to digest in the Housing and Economic Recovery Act of 2008.

One provision is intended to help seniors by reining in fees and fraud associated with reverse mortgages.

Reverse mortgages were largely created for seniors who have a lot of equity in their homes but little or no savings.

This type of loan allows seniors, who are 62 or older, to borrow against their equity. No payment is due on a reverse mortgage until the homeowner moves, sells, or dies. If the home is sold, any remaining equity after the loan is repaid is distributed to the borrower or to the borrower's estate.

To qualify for this loan, you have to own your home outright or have a low enough mortgage balance that can be paid off at the closing with proceeds from the loan. Borrowers, who retain title to the home, can take the loan as a line of credit, a lump-sum payment, fixed monthly payments, or a combination. The loan size depends on the borrower's age and other factors.

Under the new law, the amount a senior can borrow through a reverse mortgage has been increased to $417,000 nationally. However, that limit could be pushed to $625,000 if the borrower lives in a high housing-cost area. Currently the amount a senior can borrow ranges from $200,160 to $362,790.

Most important, the law reduces fees on this type of loan. It cuts the origination fee to 2 percent of the first $200,000 borrowed and 1 percent for any amount after that. The origination fee can't exceed $6,000. The law does allow for the cap to adjust, based on the annual percentage increase in the consumer price index.

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.

The Financial Industry Regulatory Authority, which regulates the securities industry, has issued several warnings about reverse mortgages.

"Reverse mortgages may benefit some senior investors by unlocking their home equity, but they should only be entered into carefully and with a complete understanding of the consequences," Mary L. Schapiro, chief executive of FINRA, said in a speech in June.

The housing act requires the government to conduct a study to look into the costs associated with reverse mortgages.

Many seniors who consider a reverse mortgage do so to cover necessities such as healthcare costs, according to AARP.

Since so many seniors see no other option than to tap their home's equity to pay for everyday expenses, I'm glad the new law provides them some protection.

Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com.