Expert Articles
Reverse Mortgage
“Past and Present”
What is a reverse mortgage? You may have a general idea. You’ve seen commercials on television and watched “Special Reports” on the subject, not to mention the offers you’ve received in the mail. But any single source of information may be biased or leave out key details. It’s important to get a full perspective that covers the whole story, both positive and negative.
The reverse mortgage has been around for more than 20 years. Known as the Home Equity Conversion Mortgage (HECM), the Government-backed reverse mortgage was introduced by the Federal Housing Administration (FHA) in 1989. The reverse mortgage was designed for seniors aged 62 or older who were reaching the age of retirement and looking for alternatives to conventional mortgages and access to the equity in their homes.
A reverse mortgage is a mortgage in every sense of the word. It is recorded as a first lien on title. It requires that any and all existing mortgages on title be satisfied with the loan proceeds. The homeowner remains as the vested owner on title just as they do on a conventional mortgage.
The main difference with a reverse mortgage is that the homeowner does not make monthly mortgage payments and, depending upon the equity position in the home, can get access to a portion of that equity (cash) without any future monthly payments. The equity may be available to the homeowner as a monthly payment, a line of credit, or some other cash payment option.
The point in time in which the reverse mortgage is repaid is referred to as the “maturity date.” In most cases, this is determined by death of the last vested owner, sale of the home, or whenever the property is no longer occupied as a primary residence.
The Past…
Two past circumstances come to mind that may have given reverse mortgages an unsavory reputation and led to common misconceptions that still persist today. In the first case, homeowners who utilized reverse mortgages were coerced into purchasing deferred annuities with the loan proceeds. They were not fully informed that severe monetary penalties would be imposed if they chose to cash in the annuities early.
In fact, these seniors needed access to their equity, which is why they applied for the reverse mortgage in the first place. So the issue was not the reverse mortgage itself, but rather the type of annuity that was being purchased with the loan proceeds. Since then, extensive protections have been put in place to prevent lenders from cross-selling any type of annuity or insurance product when they originate a reverse mortgage.
In the second case, some equity sharing programs had a feature known as a “Shared Appreciation” option. This option offered access to a slightly larger portion of the equity (cash) in exchange for giving up a percentage of appreciated value at the time the property was sold. If the home had experienced significant appreciation, the lender received the lion’s share when it came time to split the sales proceeds. On the flip side, if the property did not appreciate, then the homeowner received not only a lower rate but also access to additional equity.
Either way, there was a considerable level of risk for both the homeowner and the banks that were making these options available. The “Shared Appreciation” option is no longer offered in today’s marketplace.
The Present…
Given the complexities of the reverse mortgage, it’s a top priority to ensure that seniors and their families understand how it works. That’s why the FHA requires potential applicants to receive reverse mortgage counseling. Agencies are approved and certified by the Department of Housing and Urban Development (HUD) to advise people on HECM products; this mandatory counseling provides an unbiased third party opinion. On completion of the counseling, a certificate is issued to the applicant and processing can begin on the loan request.
In order to further increase the benefit to seniors, there have been a number of refinements and improvements to the HECM program. The FHA recently increased the HECM Lending Limit to a national level of $765,600.
In conjunction with the increased lending limit, the FHA has reduced the cap on the origination fee to what it deems “reasonable.” These moves give seniors access to the additional equity in their homes while reducing the cost to originate the reverse mortgage.
Refinancing of HECMs has also been on the rise due to the increase in the national lending limit. For example, if someone with property worth $400,000 took out a reverse mortgage five years ago, when the lending limit was restricted to $200,000, they can now tap into a portion of that additional $200,000 in equity. Because it is a refinance, another set of closing costs is required. However, the upfront Mortgage Insurance Premium (MIP) is discounted, based on the difference between the original amount paid and the proposed MIP for the new lending limit. This could potentially save the applicant several thousand dollars in closing costs.
In order to keep the process honest, there must be a tangible benefit for someone who is thinking about refinancing an existing HECM. The calculation used to determine that benefit requires that the new Available Principal Limit be at least five times the amount of the new closing cost.
HUD recently introduced the HECM for Purchase Program, giving seniors the ability to purchase a home with a reverse mortgage. The most common of these transactions allow seniors to downgrade from a larger home to a smaller one that is easier to maintain and more functional and practical for their immediate needs, but first-time homeowners can take advantage of the program as well.
It’s important to understand that the HECM for Purchase is not designed for the cash poor individual. It requires buyers to bring a significant down payment when they go to settlement. There are additional underwriting and documentation requirements with this product, due to the nature of the transaction.
In Conclusion…
The reverse mortgage does not necessarily meet the needs of every senior. Seniors who tend to benefit most are those who have built up equity in their homes over the years, but have little or no disposable income at the end of every month and little or no reserves in the bank. Thus, reverse mortgages cater to seniors who have a specific set of circumstances and need relief from the financial worries and restraints that come with living on a fixed income.
If you are considering a reverse mortgage or any other type of home finance, always remember to do business with someone you know and trust. Your credit union would be the best place to start.
Kim Petrey
Credit Union Mortgage Association
Local: (703) 425-1204 Ext. 158
Toll Free: (800) 231-8855 Ext. 158
Website: www.cumortgage.net
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