On Friday, President Obama signed into law a bill sponsored by U.S. Rep. Mike Fitzpatrick that seeks to put a cap on the amount of money senior citizens may borrow against the values of their homes. The bipartisan bill, which was also sponsored by Rep. Denny Heck passed both House and Senate without much opposition.
The new law empowers the Federal Housing Administration to create new regulations to cap the amount of money senior citizens can withdraw initially against the value of their homes. Such deals, commonly referred to as reverse mortgages are often used by people who lack liquid assets, but have high-value houses.
Usually, in reverse mortgages, the mortgagee has the option to opt for an upfront lump sum payment or monthly payments. However, those who usually opt for a large lump sum amount often run into problems.
Fitzpatrick explained, “If you take a large lump-sum payment and then three years later they’re failing behind on their taxes or insurance, then the senior is going to find themselves in a very difficult situation. He further elaborated that senior citizens often enter into reverse mortgages without fully understanding the consequences, and that the costs associated with living in and maintaining the home remains with them even after releasing a major part of the equity.
Often the lump-sum is used up quickly to pay off previous liabilities and for home repairs and many nonessential costs, sometimes leaving the senior citizen in precarious conditions.
While some industry experts have criticized the law indicating that it might lead to a decline in the demand of reverse mortgages, Fitzpatrick holds that the end was better for the home owners. He said, “I want to see that [the reverse mortgage system] continues to provide good options for seniors and permits them to maintain the lifestyle to which they’ve been accustomed in their own homes.”