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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2006

Reverse Mortgages: Why They’re Growing

Once controversial, reverse products are gaining popularity

Bad news; I would never recommend it.

That was a typical response from mortgage brokers when reverse mortgages were introduced in the late 1980s. Reverse mortgages were considered risky, confusing and expensive. Worse, they were thought to leave borrowers’ heirs with a huge liability greater than the value of their loved one’s home.

Today, the perception of reverse mortgages has changed. Under revised regulations from the U.S. Department of Housing and Urban Development (HUD), reverse-mortgage borrowers — who must be 62 years or older — can never lose their homes or be forced to move. They can still realize appreciation, and their heirs will never owe more than the home’s value.

By the numbers

The popularity of reverse mortgages is growing. In 1990, there were 157 Home Equity Conversion Mortgage (HECM) reverse-mortgage loans closed in this country, according to HUD. In 2005, 43,131 HECM loans closed. And in the first nine months of fiscal year 2006, HUD counted 55,659 new HECM loans — an 83-percent increase over the same period in fiscal year 2005.

Also of note: Congress recently lifted the cap on the number of reverse mortgages that HUD can insure. With about 150,000 HECM loans outstanding, HUD was rapidly approaching the previous cap of 250,000 reverse mortgages.

Less than 1 percent of seniors ages 65 or older have reverse mortgages. Demand is expected to double annually, however, and to grow to 5 percent of senior households by 2010. An estimated $2 trillion to $3 trillion of home equity also is available to qualifying seniors.

Further, as the leading edge of the U.S. baby boom generation turns 62 in 2008, the market is expected to continue growing. Baby boomers have shown little aversion to debt and will drive the reverse-mortgage market in the coming years.

The ‘how?’ of reverse mortgages

Many seniors are equity-rich but cash-poor. Seniors are using reverse mortgages to help their grandchildren with college, for their own recreation, and for health care and assisted-living. Other common uses are home repair and remodeling.

Loans can be taken as lump sums, fixed monthly payments, lines of credit or a combination of these options. Homeowners keep title to their houses, and mortgages are not repaid until they move or pass on.

Repayment cannot exceed the home’s value. With no monthly payments, a reverse mortgage is a financial-planning tool that effectively takes an illiquid asset and turns it into a liquid asset.

Qualifying for a reverse mortgage is well-defined and simple. The youngest borrower must be 62 years old at the time of closing. Typically, borrowers need substantial equity in their home to make it work because the amount available is based on their age, the home’s value and the home’s ZIP code.

If borrowers are in a market with strong expected appreciation, they can have a higher loan-to-value ratio than if they were in an area with little or no appreciation.

The home’s condition is a factor. But in most cases, minor deficiencies can be repaired after closing. If more-significant work is necessary, then a temporary line-of-credit is usually the source of funds until the work is completed and the reverse mortgage can close.

Credit and income are not factors in qualifying. You can even use a reverse mortgage to take a home out of foreclosure if the borrower’s age and home equity qualify.

The loans should be avoided if homeowners plan to move before benefits exceed closing and other costs. In most cases, borrowers should hold a reverse mortgage for more than four years.

Because mortgage interest is not being paid, accrued interest is not deductible. Unpaid interest can be deducted from the home’s value, however, so it may indeed reduce the estate’s value.

But homeowners can draw against the available equity any time without the tax consequences of selling stocks or other investments. This helps keep things simple.

Reverse-mortgage products

Of the handful of reverse-mortgage options in the industry, the HECM from the Federal Housing Administration (FHA) is the most popular. Many borrowers find comfort knowing the federal government insures it.

Fannie Mae created the Home Keeper reverse mortgage for homes valued over the FHA lending limits. Fannie Mae’s Home Keeper for Home Purchase, a separate option, lets seniors buy a new home that better suits their needs using a reverse-mortgage loan in addition to a down payment.

With Home Keeper for Home Purchase, a senior can purchase a single-family residence or a two- to four-family residence. This is good news for seniors looking for additional income, because they get the advantage of having no mortgage payments and also earn rental income.

Some lenders also offer proprietary reverse-mortgage products. With the growth trend for reverse mortgages, it is likely that more lenders will get in the game with their own proprietary products.

•  •  •

The reverse-mortgage process is regulated and well-established. Mandatory third-party counseling —now place in many areas — ensures that seniors understand the consequences of getting a reverse mortgage.

A reverse mortgage my not be the best option for everyone, but it will help many people.


 
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