Many seniors living in housing cooperatives are largely shutout of the ability to tap into their housing wealth using a reverse mortgage. But while there has been little movement from regulators to expand reverse mortgage access to co-ops, there are several organizations who—even after 16 years—are not giving up the fight just yet.
Housing co-ops offer residents the unique ability to control a shareholder stake in the corporation that owns the property. In areas where the cost of living is high, such as New York City, co-ops could be a less expensive option than buying a condo or renting an apartment, especially for older homeowners.
Co-Ops, a description
About half of all co-ops are “limited equity” cooperatives, according to NAHC. In order to buy into the complex, many limited equity co-ops require residents to be below a certain income level. Buyers are also required to make a cash payment and provide acceptable credit history as well as a good rental history with previous landlords.
“Market rate” developments comprise the other half of co-ops. In these complexes, the prices of shares are determined in a free market between buyers and sellers. Similar to limited equity co-ops, market rate facilities require prospective residents to provide sufficient credit history that demonstrates their ability to cover monthly charges to pay the blanket mortgage, as well as real estate taxes and utilities.
Approximately 30% of all housing in New York City is cooperative, according to the National Association of Housing Cooperatives (NAHC). Compared to the rest of the U.S., New York State is home to virtually half of all of the housing co-ops in the nation, according to the Council of New York Cooperatives & Condominiums (CNYC).
For the past 16 years, the CNYC and NAHC have been lobbying for legislation that would allow reverse mortgages for New York seniors living in co-ops. Thus far, their efforts have affected little change in the current policies of the Department of Housing and Urban Development (HUD).
At the root of the issue is the fact that co-ops are considered personal property, not “real” property in the sense that shareholders own shares in the corporation that owns the building, said Mary Ann Rothman, executive director at the CNYC.
“There isn’t real estate to collateralize reverse mortgages in a co-op,” Rothman told RMD.
This distinction in the ownership of the property restricts co-ops from being eligible for HUD-approved Home Equity Conversion Mortgages. Co-ops also prohibitive when it comes to allowing residents to take on mortgage debt in general.
Housing co-ops set strict limits on the level of borrowing they permit their shareholders, so there are built-in consumer protections that don’t exist with loans to individual home owners nor to condo unit owners, Rothman said.
As such, any loan in a housing cooperative receives “double scrutiny,” she added, since the co-op Board reviews any loan request before signing the recognition agreement the bank will require.
Aside from not meeting HUD requirements for reverse mortgage eligibility, co-ops are also stunted by a 1994 New York State regulation, which prohibits these loans in housing cooperatives. Under current state law, only one- to four-family residences and condos are eligible for reverse mortgages in New York.
At the request of constituents, New York State Senator (D) Jeff Klein introduced legislation (S. 07844) in May that aims to amend the state’s real property law, to authorize proprietary reverse mortgages in New York for seniors age 70 or older.
Following its unanimous passage in the Senate by a vote of 59-0, the legislation, which is co-sponsored by State Assembly member Jeff Dinowitz, was delivered to the Assembly on June 2, where it has sat until the Albany legislative session ended on June 17.
A change in New York law, as proposed by A. 10246 (the same as S. 07844), would help facilitate the ability of co-op owners to tap their home equity through reverse mortgages, said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, in a letter to New York State Assembly Housing Committee Chairman Keith L.T. Wright.
“Unfortunately, older owners of units in cooperatives in NY State are currently precluded from utilizing this important tool which is quickly being recognized as an important resource for covering the costs of maintaining a home, including cooperative fees and assessments, or to pay for home health care, personal care or other expenses incurred as people age, often a period of life in which they have diminished income and cash flow,” Bell wrote. “We strongly encourage you [Wright] and your colleagues to pass this simple, yet important, legislation.”
Although the New York State Legislature has already adjourned without taking any further action on the reverse mortgage legislation, groups like the CNYC are still hopeful they can educate lawmakers to make make meaningful progress towards expanding reverse mortgages to co-ops.
“Our outreach efforts have brought much more attention to this issue and so, undaunted, we shall continue our efforts,” Rothman said.
An untapped opportunity
With the highest concentration of housing cooperatives in the U.S., New York presents a vast, untapped opportunity to expand the reverse mortgage market, that is, if the day ever comes when such products will be made available to co-op dwellers.
New York is already one of the largest volume states for HECMs. At the end of Fiscal Year 2015, the state accounted for roughly 6% of all HECM endorsements, according to HUD data.
While at times it seemed like HUD would provide guidelines on reverse mortgages and co-op eligibility, no significant changes have been delivered just yet.
In 2000 and again in 2008, the NAHC secured federal legislation authorizing reverse mortgages for housing cooperatives and mandating HUD to develop guidelines for these loans.
The American Homeownership and Economic Opportunity Act of 2000, passed by the 106th Congress and enacted into law in 2000, allows HECMs for housing cooperatives.
In 2008, HUD issued a notice of a proposed rulemaking that would amend the National Housing Act to expand HECMs to include “approved” cooperative housing developments.
“The expansion of the HECM program, in the Department’s view, would contribute to the effort to broaden reverse mortgage financing opportunities for elderly homeowners,” HUD wrote in the 2008 proposed rulemaking.
Despite these actions, HUD has never promulgated guidelines to make reverse mortgage access in co-ops a definitive reality. In a meeting between CNYC, NAHC and HUD officials during the first week of May, Rothman said HUD made it clear that the agency does not plan to make reverse mortgage loans to housing co-ops and therefore will not produce such guidelines.
“The door is open for further discussions for how standards could be tested, but they [HUD] were firm in saying there wouldn’t be guidelines for HECM reverse mortgages in co-ops, Rothman said.
The loss of the possibility of HECMs is far more “devastating” for other parts of the U.S. than it is for New York, said Rothman, who is confident that once the state obtains the needed legislation, this will open the gates for lenders to begin offering proprietary products in the area.
“We will ask our lawmakers to amend their legislation to spell out a panoply of consumer protections, such as those in the HUD guidelines for reverse mortgages for condominiums,” Rothman said. “And we will encourage our members to continue their grassroots messages to lawmakers of the need for reasonable reverse mortgages to enable seniors whose homes are in housing cooperatives to be able to live in those homes.”
Written by Jason Oliva