As published in Scotsman Guide's Residential Edition, May 2011.
Without a doubt, the reverse-mortgage market faces some serious and significant challenges. As property values continue to shrink, many senior borrowers find themselves with less equity in their homes. Moreover, many reverse borrowers have defaulted by failing to make necessary tax and insurance payments. And underwriting standards for government-sponsored reverse mortgages could tighten further, thus keeping many borrowers from qualifying.
Those problems and others represent major concerns for mortgage brokers and loan originators working in the reverse-mortgage space. At the same time, many reasons exist to be excited about the future, including increased curiosity about reverse mortgages. This market is poised to enter its strongest period yet.
Brokers and originators who want to diversify their lending business should give reverse mortgages serious consideration.
Although the U.S. Department Housing and Urban Development has tightened the rules governing Home Equity Conversion Mortgages (HECMs) — which are backed by Federal Housing Administration (FHA) mortgage insurance and responsible for about 99 percent of the reverse market — it also has made some positive adjustments to the HECM program. Those changes can decrease the cost of taking out a reverse mortgage and broaden the product's appeal.
The biggest change was the launch of the HECM Saver program, which effectively eliminated the upfront mortgage-insurance premium, reducing it to 0.01 percent of a home's value. That compares to an upfront premium of 2 percent for loans taken out under the HECM Standard program.
In return for the lower premium, seniors can't borrow as much money using a HECM Saver as they can with a HECM Standard. But that doesn't make the Saver less attractive. On the contrary, the drastically lower fees and smaller loan sizes will appeal to a different — and larger — pool of prospective customers.
For example, the HECM Saver should appeal to seniors who want a smaller loan and those put off by the higher costs associated with the Standard program. In some cases, borrowers might be seeking a short-term loan they can pay off.
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