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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2007

What to Know About Reverse Mortgages

This continually growing market can offer opportunity to mortgage originators and their clients

The growth of reverse mortgages has created excitement in the mortgage industry.

The number of federally insured reverse mortgages made in the United States in fiscal year 2006 was 76,351, a 77-percent increase from fiscal year 2005. The growth continues in fiscal year 2007, with the Federal Housing Administration (FHA) reporting a record number of reverse mortgages for the first seven months.

Many factors have contributed to greater awareness and public acceptance of reverse mortgages in the past few years, including better consumer understanding and a greater number of lenders offering the product.

When entering the market, however, mortgage originators must ensure that they consider all the critical business factors. To offer reverse mortgages successfully, originators must have a comprehensive understanding of the market, regulations, operating systems and processes, as well as a greater patience with clients.

The how and who

Reverse mortgages allow homeowners ages 62 and older to convert their home equity into cash. It is a loan against a home and is not payable until the homeowner dies or sells the house.

Although many seniors have equity in their homes, some still struggle financially. In many cases, they are making house payments or need home repairs. Chronic health issues, costly prescription drugs and vehicle repairs also often add to their fiscal load. A reverse mortgage can provide a way for them to cover these expenses.

Reverse mortgages are different from forward mortgages, where borrowers make payments to decrease an outstanding loan balance. With a reverse mortgage, borrowers instead receive payments from the lender, which creates larger a loan balance over time.

There are two main types of reverse-mortgage products. The most popular are FHA Home Equity Conversion Mortgages (HECM), which make up more than 90 percent of all reverse mortgages originated. The main advantage of the HECM is that it is federally insured and backed by the U.S. Department of Housing and Urban Development (HUD). It is generally available almost anywhere and has no income, medical or use requirements.

The second is a proprietary reverse mortgage. Fannie Mae offers a reverse mortgage called the Home Keeper, and other mortgage lenders have developed proprietary reverse products. These reverse mortgages often have a higher rate than traditional home loans. But if a borrower has a higher-valued home, a proprietary reverse mortgage can often provide larger payments than a HECM.

Many potential reverse-mortgage borrowers are apprehensive about a reverse mortgage affecting other benefits such as Social Security or Medicare. But because the money generated by a reverse mortgage is not considered income, it is not taxable and therefore does not affect these benefits.

There are three main ways to receive payments from a reverse mortgage: by tenure, term or line of credit.

  • Tenure payments are made in equal monthly payments to homeowners for as long as they live in the home.
  • The term-payment method disburses equal monthly payments that are predetermined for a specified number of months.
  • A line of credit may be taken as a lump-sum payment or cashed in when the homeowner needs the money. Lump-sum payments are commonly used to pay off debt, such as first liens on a pre-existing mortgage or home-equity line on the property.

The tenure and term payment structures can be combined with the line-of-credit payment option.

Growing a new business

The increase in reverse-mortgage popularity has much to do with the fact that each day for the next 20 years, thousands of baby boomers will be turning 62 years old. This puts originators in a good position to begin offering reverse mortgages.

Adding reverse mortgages to your business is not like adding a traditional mortgage product, however. In addition to the aforementioned guidelines, reverse mortgages put more emphasis on educating borrowers over a longer period. Originators also must think through their lead-generation programs and operational systems.

Because reverse mortgages are so different from other mortgages, many originators are spinning off new businesses to focus on this market. Several have adopted an additional name with a more focused approach to reverse-mortgage origination. This is often necessary to give the business stronger market presence.

In addition, brokers must be FHA-approved before offering HECM reverse mortgages and must conform to other common FHA rules and regulations. The two main levels for brokers are loan correspondent (Mini-Eagle) or lender (Eagle).

Further, brokers have several marketing advantages when adding reverse mortgages to their business. Beyond traditional marketing and referral programs, they can turn to well-established lead aggregators within the market to assist in educating seniors through national marketing campaigns and producing quality leads.

Because the reverse-mortgage sales cycle generally is longer, it is imperative that your business planning addresses systems for managing leads, supporting sales efforts and loan origination. Brokers can efficiently capitalize on reverse-mortgage opportunities by using a technology platform that tracks and manages leads in addition to generating and analyzing customer quotes.

A different sales approach

The reverse-mortgage sales process requires originators to have a different set of sales skills and mind-set from traditional originators, including a different approach to marketing. Only after learning seniors’ challenges and concerns can loan officers understand how to present this reverse mortgages’ benefits.

Unlike the traditional, fast-paced mortgage culture in which lenders are encouraged to “hunt” for potential borrowers, the reverse-mortgage process requires that lenders take more of a “farmer” approach. The product could take 60 days to originate, for various reasons. Originators must devote more time to cultivating and nurturing relationships with seniors, guiding and educating them along the way. Family members also are often involved in the decision-making process, and lenders must be sensitive to the needs of all involved.

From the beginning, the education process must include time to dispel doubts and misconceptions about reverse mortgages. For example, many seniors have a misunderstanding that they could lose their homes. This often is because they are unaware of the fact that when they are no longer using the home as their primary residence, the remaining equity in the home still belongs to them or to their heirs. The reverse mortgage affects none of their other assets, and no debt is passed along to the estate or heirs.

Brokers should be prepared to present a well-developed financial plan and to give borrowers peace of mind. Because homeowners will never owe more than the home’s value, they can remain financially independent and in a position to help their children, family members and themselves.

Borrowers also must speak with an FHA-approved independent third-party counselor and receive a counseling certificate before signing a loan application or incurring any fees. Federal law also requires reverse-mortgage borrowers be given a “Total Annual Loan Cost” calculation. Therefore, the reverse-mortgage process requires some endurance.

Market rapidly evolving

The current reverse-mortgage market began in 1990, when the HUD instituted the federally insured HECM. Six years later, Fannie Mae launched its own reverse-mortgage product, the Home Keeper. So far, the FHA has endorsed 61,101 HECM loans during the current fiscal year, compared to 39,674 during the same period a year prior.

This past October, Ginnie Mae, a secondary-market participant, created a HECM mortgage-backed security. The move increases liquidity options for lenders. Other secondary-market competitors entering the market should drive down borrower costs.

In addition, more lenders are offering their own reverse-mortgage products. Nearly all these programs have lower upfront costs and higher loan limits than the HECM.

Brokers also have more options available. Flexible-rate alternatives permit brokers to raise or cut margins on government-insured reverse mortgages. Newer products give brokers options that they can use to shape a product to conform to borrowers’ specific needs.

The reverse-mortgage marketplace clearly is emerging for originators who have done their research. New loan products, sources of supply and a growing secondary market are providing more choices for companies looking to enter this market. Originators who wish to grow their businesses would be wise to tap into this continually growing market.


 


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