Image: Money in nest © Steven Puetzer, Getty Images

A home may still be a man's castle, but it's likely to be a threadbare one in financial terms. An Ameriprise Financial survey released earlier this year found that people may have unrealistic expectations about how much they can rely on home equity in retirement. And the U.S. Department of Housing and Urban Development recently formalized curbs that will reduce the amount of funds people will be able to get from reverse mortgages.

Ameriprise polled 1,000 people ages 50 to 70 who had at least $100,000 in investable assets (not counting their homes). It found people were upbeat about retirement but may have been basing their outlooks on misconceptions about the health of their finances and the expenses they would likely face in retirement.

"There seems to be a significant disconnect between the expectations that Americans have for their lifestyle in retirement, and the financial steps they're taking -- or not taking -- to make those expectations a reality," Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial, said in a statement.

In terms of their homes, nearly half of those polled said they expected to use home equity to help fund their retirement. Ameriprise termed that response "a surprising statistic considering that housing values remain well below pre-recession levels in many parts of the country. Doing so may be even more difficult for the 37% of homeowners who say they've not yet or are not on track to pay off their mortgage before they retire."

Even owners with substantial equity in their residences will face a tougher time in accessing that wealth, short of selling their homes. That's because of HUD's action, which was taken to stem large and growing losses in the Federal Housing Administration (FHA) program to insure reverse mortgages through what is called the Home Equity Conversion Mortgage (HECM) program.

Reverse mortgages are touted as a way for seniors (borrowers must be at least 62) to borrow funds against their home equity, while continuing to live in their home as long as they wish without having to make additional mortgage payments.

Over longer periods, loan charges and private-lender fees often exceed the home equity the owner has in the house. When the occupants die or leave, they and their families must repay all these accumulated charges to retain ownership of the home. However, HECMs are "non-recourse" loans, meaning borrowers can simply make no payments, walk away from the home, and turn ownership over to lenders.

The lenders, in turn, are protected from losses by federal insurance. But it turns out that these insurance losses have far exceeded the cost of HECM insurance premiums. One of the main reasons is that aging borrowers have struggled to pay property taxes and home-insurance premiums. This puts them in default. Lenders may look to tap any remaining equity to pay taxes and insurance expenses, but then must either carry mounting losses on the property or move to take possession of the home and sell it. The FHA is on the hook for insured losses when this happens.

To reduce its exposure, HUD last week said it would stop offering a popular HECM product for fixed-interest rate loans and restrict such loans to what's called the HECM Saver loan. This type of reverse mortgage charges borrowers much lower insurance premiums than the loan that is being suspended. But it protects the government from loan losses by reducing the percent of a home's equity that an owner can borrow. This leaves more equity under the control of private lenders -- for charges and things like overdue taxes and insurance -- and creates a cushion against FHA insurance losses.

In addition to the HECM changes, the agency says it will also be working to better evaluate loan applicants' financial ability to keep up with property taxes and insurance. There have been embarrassing cases of HECM loan terms forcing older women from their homes after their husbands died.

In a statement to U.S. News, HUD Deputy Assistant Secretary Charles Coulter said, "HUD believes there are four fundamental changes that are required: restricting the amount of the up-front draw; implementing a financial assessment process to ensure seniors are equipped to meet their long-term financial obligations; requiring some combination of a tax and insurance set-aside and/or borrower escrow account; and addressing complications resulting from non-borrowing spouses."

"HUD is actively developing policy to address these issues administratively and is also working with Congress to enable faster implementation of these critical changes," Coulter added. "If we are unable to make these changes in a timely manner, HUD may be forced to take, sub-optimal, short term measures to improve the economics of the program."

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