On Nov. 6, new regulations officially raised the maximum amount that homeowners, age 62 years or older, can "borrow" by selling their homes back to the bank.

The new law, H.R. 3221: Housing and Economic Recovery Act of 2008, raises the maximum amount of a reverse mortgage to $419,000, from the old limit of $200,160 in rural areas and $362,790 in metropolitan centers. It also caps closing costs at $6,000. Prior to the new law, closing costs on reverse mortgages could easily run to $7,000 or more.

Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA) in Washington, D.C., hailed the move as a win for retirees and said the old limits descriminated against retirees in areas where houses cost less. "Reverse mortgages allow seniors access to wealth to pay for things like healthcare in retirement," he says. "A piece of medical equipment costs the same whether you live in Peoria or Los Angeles. It didn't make sense to discriminate."

Buyer Beware

The new limits could also add to retirees' asset pool for generating retirement income. But broker-dealers remain wary of reverse mortgages, which are regulatory hot potatoes for advisors. For one, while the new limits cap origination fees at $6,000, that's still a lot of money. And as AARP legal policy director David Certner says it's not a good idea to invest money borrowed at a cost of around 10% of the total loan unless the circumstances are dire. "To put [reverse mortgage] money into an investment product that also charges fees doesn't make much sense," he says. Primevest declined to comment on the new limits at all, and Raymond James says it won't let any of its clients invest funds raised though reverse mortgages. But for some retirees who either haven't saved enough or who have been slammed by recent market turmoil, the new limits may make reverse mortgages a welcome option. But "If I was a financial advisor, I'd look at all other sources before tapping reverse mortgages," Certner says.

Despite their drawbacks, reverse mortgages have grown in popularity. Bell predicts that new higher maximums will create a "surge of activity" as people look to home equity as a source of retirement income. According to the latest report from the NRMLA issued on Oct. 14, the industry closed 112,100 home equity conversion mortgages, or HECMs, in fiscal 2008, which ended Sept. 30, surpassing the record loan volume of 107,558 for 2007.

A September AARP report revealed a more troubling and immediate need that could force more retirees into reverse mortgages: An increasing number of people over age 50 are at risk of losing their homes altogether. More than 684,000 homeowners age 50 and over were delinquent, in foreclosure or lost their homes during the six months ending December 2007, the most recent data-and that was before the crisis really hit. A second AARP poll, from November 2008, indicated that the majority (58%) of workers age 45 and older know they're not saving enough for retirement and they don't feel there's anything they can do about it: 83% of respondents say they don't have enough to cover current bills and expenses. While advisors are squeamish about recommending HECMs, many retirees will need to keep all their options open going forward.