Potential changes to HECM rules might spur activity for eligible homeowners

Josh Stephens, president, Reverse Mortgage Direct LLC

As published in Scotsman Guide's Residential Edition, May 2010.

Older borrowers suffered some of the harshest effects of the mortgage meltdown and ensuing economic downturn and recession. Many lost huge chunks of their retirement savings and pulled their investments before the stock market recovery began. Massive decreases in home values also have wreaked havoc on millions of older U.S. homeowners, many of whom find themselves unable to sell their longtime residences, which often are far larger than they need. To top it off, Social Security-payment recipients won't see a cost-of-living increase this year.

So where's the good news?

For starters, interest rates remain low, and property values have stabilized in many areas. For eligible homeowners, this means now is a good time to take out a Home Equity Conversion Mortgage (HECM). Mortgage brokers can help.

The Federal Housing Administration (FHA) insures HECMs, which account for almost all reverse mortgages originated in today's market. Reverse mortgages allow homeowners ages 62 and older to turn a portion of their home's value into cash with no monthly payments due and no repayment as long as the owner lives in the home. Homeowners can access funds in the following ways:

• Lines of credit, often used for financial planning
• Tenure payments, which provide borrowers fixed monthly payments
• Lump sums, often used to pay off mortgages or purchase large items
• Term payments, typically used for long-term-care expenses
• Any combination of the above

While owners still reside in their home, they maintain responsibility for property taxes, homeowners insurance and general maintenance. HECMs become due only when the borrowers die or no longer live in the home permanently.

When the loan is due, it may be refinanced or paid in full to avoid having to sell. HECMs have no prepayment penalties or requirements for income or assets. They also don't require a minimum credit score to qualify.

Brokers who work with HECMs must keep tabs on FHA rules and proposals, including those pertaining to the relationship between brokers, lenders and the FHA. U.S. Department of Housing and Urban Development (HUD) mortgagee letters are available at sctsm.in/mortgagee.

Within the past few years, several changes to the HECM program have strengthened consumer protections and lowered fees. Other alterations have reduced the amount of money available to eligible homeowners through the program. This occurred this past October, when HUD changed the principal-limit-factor table that affects the percentage of a home's value that reverse borrowers can access.

HUD also is reportedly creating a proposal to further lower the principal limits -- the amount available to homeowners -- and increase mortgage-insurance premiums this coming October. This would reduce the amount of money homeowners can obtain from HECMs. This marks another reason why now is a great time to encourage eligible borrowers, especially those with high-value homes, to lock in HECMs. If these homeowners don't need the money right away, they can access their home equity by setting up HECMs and call on the available funds later.

By originating these reverse mortgages, brokers can help eligible homeowners financially and increase their own bottom line.

Josh Stephens is president of Reverse Mortgage Direct LLC. He can be reached at (866) 777-6209 or josh@reversemortgagedirect.net.