The top Democrat on the House Banking Committee has introduced legislation that would reduce the cost of federally-insured reverse mortgages for borrowers who use the loan proceeds to pay for long-term health care insurance.

Reverse, or home equity conversion, mortgages are designed to allow house rich but cash poor senior owners to tap into the equity they've built up in their homes over the years without having to sell or move out. Borrowers can use the funds for whatever they want, but they can't be forced to leave when the money runs out. They can remain in their homes until they choose to leave or pass away.

The Affordable Long-Term Care Insurance Act would waive the insurance fee that is paid at closing on home equity conversion mortgages insured by the Federal Housing Agency, as long as the money is used to pay the premiums for long-term care coverage.

The upfront FHA insurance fee is equal to 2 percent of the FHA maximum claim amount. A waiver could reduce the cost of a reverse mortgage by as much as $4,400, thereby "eliminating a significant disincentive" to use the product, Rep. John LaFalce (D, NY) said in a letter to his colleagues seeking their support for the measure.

The 13-term, Buffalo-based lawmaker plans to attach the bill to broader home ownership legislation now before his committee.

Meanwhile, Peter Bell, president of the National Reverse Mortgage Lenders Association, has called on Congress and the FHA to allow borrowers to finance a larger portion of the origination fee that lenders charge when making federally-insured reverse mortgages.

The last time the financeable amount was increased was in 1993, when it was raised from the greater of $1,500 or 1 percent of the maximum claim amount to the current $1,800 limit. The NRMLA has proposed that the ceiling be increased to 2 percent, a change that also is supported by the Mortgage Bankers Association and the AARP.

This would mean that up to $4,397 in origination fees (2 percent of $219,849, the largest loan amount the FHA can insure) would be financed as part of the reverse mortgage.

According to Bell, the change would benefit borrowers because they wouldn't have to come up with cash from other sources to close the loan. "The upfront cash that is currently required can be a deterrent to prospective clients who would benefit from the reverse mortgage," he says.

In addition, it would reign in origination fees. Under the current rules, there is no limit on the amount that can be charged, only the amount that can be financed. But under NRMLA's proposal, the origination fee would be limited to 2 percent and would be all-inclusive, covering any fees paid by funding lenders to originating brokers or agents.

The plan also would put a stop to the practice of arranging bridge loans from third parties to provide borrowers with funds for closing and then having those loans repaid from the proceeds of the reverse mortgage. And it might attract more lenders to the home equity conversion business.

Noting that many reverse lenders don't charge hard-pressed borrowers more than what can be financed, even though it costs several hundred dollars more to make the loans, Bell says there is "too little revenue in a HECM loan to make it attractive" to potential new entrants to the field.

"A reverse mortgage loan requires a lot more work a lot longer lead time from initial inquiry to application than a forward mortgage. As a result, the time and expense incurred by the lender are typically far greater than for other types of loans," the industry spokesman explains.

"The net result is that far fewer lenders are willing to offer reverse mortgages, making distribution somewhat more limited than it ideally should be. And for those who do choose to offer them, the remuneration under the present rules don't afford the opportunity to do the outreach, marketing and advertising that would make the product more successful."

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Published: February 16, 2000

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