American seniors grappling with strained savings following the deepest recession in generations will soon face new hurdles in tapping a tool some have used to help finance retirement: the federal government's reverse mortgage program.
An upcoming change in rules will cut the number of borrowers eligible to draw down cash against the value of their homes by 22 percent, according to an estimate from Reverse Market Insight, and some homeowners are rushing to beat the deadline.
"I had limited options and was up against a wall. It was grim," said Cheryl Honeyman, a widow living in Brookings, Oregon, who locked into a reverse mortgage this month. "I was lucky to get this loan when I did."
For the 63-year-old, who inherited her home near the Oregon coast when her parents passed away four years ago, the government-backed loan means she can live on the money she gets from Social Security without having to worry that an unexpected expense could force her to sell her home.
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The program is costing the government. The Federal Housing Administration is expected to spend $2.8 billion this fiscal year backing reverse mortgages. Under congressional pressure, the FHA will implement new rules on Tuesday designed to stem those losses.
The changes will limit the amount seniors can draw down, impose higher mortgage insurance fees and put in place tougher vetting of applicants. But they are likely coming too late to prevent the FHA from tapping the U.S. Treasury for a cash infusion for the first time in the agency's 79-year history.
Reverse mortgages, available to borrowers aged 62 or older, pay out a home's equity to the borrower, either in installments or lump-sum payments. They are repaid when the borrower dies or moves out of the house, although the borrower must still pay property taxes and homeowners' insurance.
The loans, most of which are insured by the FHA, have proved to be a lifeline for many Americans whose savings were depleted during the deep 2007-2009 recession.
Honeyman was anxious that the value of her home had significantly dropped during the recession and would limit how much money she would receive. Her home appraisal came in at $180,000 and she was able to take a $105,000 lump-sum on the property, which was purchased 13 years ago for $220,000.
If Honeyman had qualified for a reverse mortgage backed by the FHA under the new rules, she would have owed more in insurance costs and have been eligible for less money.
Loan officers and financial advisers are preparing clients for the upcoming shift, which they say will reduce the attractiveness of the loans for a vast number of seniors.
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Deborah Nance, a reverse mortgage specialist with iReverse Home Loans in the Los Angeles area, said she worries the changes will mainly hurt borrowers with lower incomes, heavy debt obligations or weak credit histories.
"Those that might have previously (had) a lump sum option to pay off mortgages might be turned down," she said.
Nance has recommended against reverse mortgages when she hears that seniors intend to move within five years, or if they have family members living with them on a long-term basis.
The problem for the FHA is that an increasing percentage of these loans are ending up in default. A record 54,000 FHA-insured reverse mortgage borrowers - or 9.4 percent - have defaulted. That's up from 8.1 percent in July 2011.
Unlike traditional loans, the majority of defaults are triggered when borrowers are unable to pay their property taxes or keep up with their homeowners' insurance.
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Alba Moesser, 84, was financially independent and living debt-free when her son came to her with a business proposal. She found a way to help supply cash for the budding entrepreneur with a reverse mortgage.
"I was able to help him rebuild an apartment complex that is now rented out," said Moesser, who holds a Ph.D. in Hispanic literature and hasn't yet retired.
Moesser had taken out a reverse mortgage on her Covina, California home in 2011, but she refinanced into a fresh one this summer to come up with more cash. Under the pending rules, the amount she would have been able to take out would have been cut by about 15 percent, assuming her application made it through the new financial assessments.
The popularity of reverse mortgages started to rise in 2001 and the volume of new FHA-backed reverse mortgages hit a peak of 115,000 in 2009. That number has since declined for three straight years, although it is expected to move higher, even under the tighter terms, as an increasing number of Baby Boomers retire.
By 2011, some major players, including Wells Fargo and Bank of America, stopped originating new reverse mortgage loans, in part because the lenders believed they were becoming riskier.
"It was originally intended for those borrowers considered house-rich and cash-poor. But now it is increasingly used as a tool for seniors tapping equity lines for broader retirement packages," said Stephanie Moulton, an assistant professor at Ohio State University who has served as a counselor for AARP, a retired persons' trade group.
Before her loan, Honeyman said: "I was barely squeezing by."