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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2016

Don’t Get Stuck, Go in Reverse

Home Equity Conversion Mortgages can help originators tap into the 62-and-older market

Don’t Get Stuck, Go in Reverse

Consider the following borrower segment: They have $4 trillion in un-tapped equity, their ranks are growing by roughly 10,000 individuals every day and represent the fastest-growing group of homebuyers in the United States. In addition, a mortgage product suited for their needs sees minimal interest-rate impact, on volume and originations.

This is the borrower who is 62 and older. This is the senior homeowner — the Home Equity Conversion Mortgage (HECM) reverse borrower. If you have thought about offering or selling a HECM, this is the perfect time to learn more about it.

At times, the reverse-mortgage product has had a less-than-stellar reputation. But HECMs have seen many changes, making the product the safest, most-regulated and most-compliant it has ever been.

Inside HECMs

HECM is the Federal Housing Administration’s reverse-mortgage program. It allows homeowners, ages 62 and older, to withdraw equity in their house, receiving funds in the manner they choose.

The HECM industry spent the second half of 2015 learning, understanding and adjusting to recent changes, and realizing that these changes help strengthen the product now and long into the future. In fact, HECMs are able to serve consumers in their long-term financial planning and have become an excellent fit for many borrowers who apply.

These new guidelines require borrowers to meet a threshold for their capacity to pay their bills and living expenses and their willingness to do so, based on their history, tying in current income and payment history. They must have sufficient income to be able to pay their home maintenance, taxes, insurance and basic expenses. There is no set debt-to-income ratio; it simply must be more than the expenses calculated.

Although credit scores are not considered with HECMs, the borrowers’ history of payments on credit, along with their tax and insurance history, has a major impact on the approvability of the loan. It also impacts whether a life expectancy set-aside (LESA) will be required for borrowers. The guidelines allow for flexibility in the underwriting process because of extenuating circumstances, and other compensating factors may also be considered in approving the loan. If a LESA is required, the full amount of their taxes and insurance payments will be set aside in an escrow account, and those payments will be made on the borrower’s behalf.

Overall, these updates bring clarity to a loan that may have previously been confusing or sounded too good to be true. Now, the HECM is more similar to a traditional forward loan than ever. Borrowers must meet income guidelines just as they do on any loan, but with the reverse, the ability to never make a payment is the key differentiating factor.

Other options

The HECM also has seen an increase in the use of the adjustable-rate-mortgages option with an available line of credit. Unlike the less popular fixed-rate product option, borrowers have the option to take a smaller amount of money from the transaction — only what their immediate needs require — and leave the rest in a line of credit that actually grows in size over time. This is an ideal product option for many seniors, as it allows for flexibility in deciding how to access the equity in their homes.

Some of the most seasoned professionals 
have little knowledge about reverse mortgages.

Another growing segment in the reverse niche is the HECM-for-Purchase loan. As the 62-and-older demographic group has become more mobile, buying and selling homes more frequently than in the past, this option is quickly increasing in popularity.

In HECM for Purchase, seniors put down a larger downpayment than on a traditional forward loan, and the proceeds from their reverse mortgage are used toward their monthly payments. This allows homeowners to better manage their retirement and monthly expenses by knowing they will never have any mortgage payment to make. Many homeowners are selling their homes, and with the nest egg they have built up and the cash they receive from the sale, they are able to put down the required 30 percent to 50 percent toward a new home. By eliminating monthly mortgage payments, this option ensures they have one less financial burden and expense to deal with every month for the rest of their life. The security and financial planning it affords the homeowner is significant.

Getting started

Becoming a HECM originator is not something that happens overnight. It can, however, be a wise option for originators to add to their product line, because it increases income and referral bases.

There are several steps those interested in originating HECMs should take.

  • Get educated. Attend the numerous webinars and trainings offered by industry leaders. These resources are informative and structured for those with little knowledge or experience with the HECM, covering the product and the origination and sales process.
  • Review your database. There is significant opportunity within the leads you have —   borrowers who didn’t qualify for a traditional loan, turndowns, or even old closed loans. Begin a marketing campaign aimed at borrowers 62 or older to educate and inform them on the benefits of HECM loans.
  • Educate your referral partners. Some of the most seasoned professional financial advisers, attorneys and insurance agents have little knowledge about reverse mortgages. What knowledge they do have may be outdated. Use the recent changes as a way to educate them on reverse loans. Don’t forget to talk to Realtors about the changes. The improvements made to the HECM program may help them find new potential customers.

•  •  •

If you are an originator looking to break into the HECM area, it’s important to find a lender that has the resources to support you and your business. Look for a lender that has a successful track record closing HECM loans and provides you with the tools and resources to help you educate your customers and referral partners.

The statistics and demographics do not lie — the new HECM is better than ever and is poised for significant growth well into the future. 


 
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