The recent federal budget deal may have averted a government shutdown, but some programs were hard hit by the last-minute cuts – including federal Department of Housing and Urban Development (HUD) funds which help pay for counseling for seniors seeking reverse mortgages.

Before seniors can take out a reverse mortgage, federal laws require they attend a counseling session with an independent advisor to make sure they fully understand the risks and rewards of the product, and aren’t be pressured or bamboozled into signing away their rights. HUD had partially funded counseling agencies in order to ensure that vulnerable, low-income seniors receive good advice.

But during the last-minute budget compromise, the full $88 million, 2011 budget for the counseling program was “zeroed out,” meaning that no funds remain.

The slash “caught everybody off guard, everybody in the counseling community, the lending community,” said Peter Bell, president of the National Reverse Mortgage Lending Association. “So there’s no real understanding of the impact at this point.”

A Difficult Charge

The cuts come at a time when Massachusetts agencies are struggling to cope with the need to bolster staff thanks to a state law set to kick in next year which mandates all lower-income seniors receive face-to-face counseling. Currently, Massachusetts has only nine approved reverse mortgage counseling agencies statewide. Some don’t offer face-to-face counseling, and the majority of counseling sessions take place over the phone.

In a statement, HUD said it is hopeful that the fiscal 2012 budget will include a restoration of the program’s funding. But with Washington gearing up for an especially tough budget fight this year, and with the past several budgets being passed months late, even if the funding request survives it’s unlikely that federal funds would be available before mid-2012.

That’s a pickle for already cash-strapped local counseling agencies. Counseling fees can often run more than $100.

“I’m out of all my grant money for this year for reverse mortgages,” said Laura Schaefer, executive director of the Plymouth Redevelopment Authority, which provides mortgage counseling for South Shore residents. “I’m charging everyone. It can be a burden. I have some very low-income people … it’s terrible. I hate to do it.”

For now, Schaefer is advising lower-income residents to shop around to other agencies that may have grant funds left, but those sources will likely dry up over the next several months.

Until this year, agencies had been authorized to charge up to $125 for sessions. But concerned by rising default risk prior to the budget cuts, HUD had already beefed up its own counseling standards, requiring counselors to delve more deeply into seniors’ full financial pictures. The cap on fees was lifted in recognition of the fact that tougher requirements would mean harder work on behalf of counselors.

While the counseling agencies are only allowed to charge enough to cover their costs, with each case needing more time, fees are likely to head north of the former $125 limit. Schaefer says she’s already heard of agencies charging $145.

‘Cut Off At The Pass’

In Massachusetts, how the face-to-face requirement is implemented could help push costs even higher. The state’s Division of Banks is currently formulating regulations, and it is not clear if they will exempt seniors for whom English is not their fist language or whose mobility is impaired from the face-to-face requirement.

“If I’m doing face-to-face counseling, I’m going to basically say ‘come [in to my office].’ If they’re going to force me to go to somebody that’s infirm, I’m going to have to charge them more, if there’s no grant money,” said Schaefer. “We’re going to have to ask the federal government for more money [in the 2012 fiscal year] – because Massachusetts doesn’t fund any of this – in our travel budgets, because we’re traveling and we have to reimburse our counselors for that.”

Whether any federal funds will survive the budget fight is doubtful.

“The administration has said that it intends to stand by their request for full funding for 2012 for counseling,” said Bell, “But who knows what will happen as Congress deals with the budget, and [where] they’re looking to find more cuts? …There’s no readily apparent sources for [more funds]. There’s a number of agencies reporting that they’re going to have to cut back operations. So I do think that we will see fewer agencies able to do the counseling.”

Schaeffer agreed that if the funding isn’t restored “there will be a shortage of counselors.”

That’s a concern for the reverse mortgage industry. A prior push to have all sessions be face-to-face in the mid-2000s resulted in months of delays before loans could close, said George Downey, founder of Harbor Mortgage Solutions in Braintree. He fears that the industry will see a repeat when the face-to-face mandate kicks in next year.

“What it can do, and what it will do, is discourage people from doing something that can be a very vital resource for them,” he suggested. “They’ll be cut off at the pass.”