Reverse mortgage applicants are among the losers in the budget deal cutting $38 billion in spending that President Obama and Congressional Republicans worked out to avert a government shutdown.
The eleventh-hour deal, which President Obama recently signed into law, cuts $88 million from the Department of Housing and Urban Developments (HUD) budget for loan counseling programs, including about $9 million for reverse mortgage counseling. Reverse mortgage borrowers are required by law to receive counseling before they sign up for such loans. With federal money no longer available to pay for counseling, many prospective borrowers will likely have to foot the bill themselves, which may discourage potential applicants.
A reverse mortgage allows homeowners 62 or older to convert the equity in their home to a flexible cash advance that does not have to be repaid until the homeowner moves, sells, or dies. Almost all reverse mortgages are made under the Home Equity Conversion Mortgage program, which is administered by HUD.
While reverse mortgages look like no-lose propositions at first glance, they are complex products that have significant downsides for some. For example, these loans carry large insurance and origination costs, they may affect eligibility for government benefits like Medicaid, and they are not ideal for parents whose major objective is to safeguard an inheritance for their children.
To help seniors make informed decisions about whether to obtain a reverse mortgage, Congress requires prospective borrowers to obtain adequate counseling by an independent third party.
“This unique counseling helps older homeowners understand the costs, benefits, and risks associated with these loans,” said Barbara Stucki, vice president for Home Equity Initiatives at National Council of Aging. “Without this funding, the older Americans who can least afford it may have to pay for this critical advice out-of-pocket.” Stucki called the budget proposal “a major setback and increases the financial vulnerability of all older adults looking to use their home to stay at home.”
Counseling funds will be cut off October 1, 2011. Before the money was cut, advocates for the elderly had been lobbying for better and broader reverse mortgage counseling.