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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2012

Make Your Mark on the Reverse Market

Help seniors get cash against their homes — while they live there

Although they have been around since the 1980s, reverse mortgages recently have become more widely accepted as a way for seniors to convert home equity into cash. Mortgage brokers and originators unfamiliar with this loan product should learn what they need to capitalize on a growing market.

The most popular reverse mortgage is the U.S. Department of Housing and Urban Development’s (HUD’s) Home Equity Conversion Mortgage (HECM). From 2007 to 2009, HECM loan production exceeded 100,000 endorsements per year nationwide. Originations decreased slightly in fiscal year 2010, when HUD insured a total of 79,106 HECM loans nationwide. Fiscal year 2011 is expected to be similar, with about 75,000 HECM loans insured nationwide. The HECM has come a long way in a relatively short time, however. In 2001, only 7,781 HECM loans were insured. Despite some fluctuations, it’s clear that the reverse mortgage trend is moving upward.

The basics

HECMs are essentially loans against borrowers’ homes that do not have to be repaid as long as the borrower lives there. The youngest borrower must be at least 62 years old, and the property must be a single-family, 1- to 4-unit, owner-occupied dwelling.

"The national FHA mortgage limit for HECM transactions is $625,500, so if a prospective borrower’s home is worth more than that amount, the funds are based on $625,500 — not the home’s market value."

HECMs also can be originated on condominium units if they are located in a project that has Federal Housing Administration (FHA) approval. All properties must meet FHA’s minimum requirements, although HECM proceeds can be used to pay for needed repairs. Borrowers cannot have any delinquencies on any federal debt nor be suspended, debarred or excluded from participation in FHA loan programs.

Borrowers may chose from the following payment options:

  • Line of credit: Borrowers draw up to a maximum amount at various times and in the amount desired until the credit line is exhausted.
  • Tenure: Borrowers receive monthly payments as long as they live in the property.
  • Modified tenure: This is a combination of a line of credit with monthly payments as long as the borrower lives in the property. This is often the most popular option.
  • Term: Borrowers receive monthly payments for a fixed period of time.
  • Modified term: This is a combination of line of credit and monthly payments for a fixed period of time. 

The amount that eligible borrowers can get depends on the specific plan chosen, as well as two factors: The older the borrowers are, the more cash available, and the higher the value of the property, the more cash a borrower can get. The prevailing interest rate also affects the funds a borrower can get (a lower interest rate means a higher amount of proceeds). Borrowers may opt to change payment options after the loan transaction closes for a nominal fee of $20. The national FHA mortgage limit for HECM transactions is $625,500, so if a prospective borrower’s home is worth more than that amount, the funds are based on $625,500 — not the home’s market value.

HECM loans must be in a first-lien position. As a result, if a prospective HECM borrower currently has any debt against their property — if it is not owned outright — it must be paid off either before getting the HECM loan or from the proceeds of the reverse mortgage. Other loans can be subordinated.

In addition, borrowers must complete a housing counseling session before proceeding with the HECM loan application. A signed housing counseling certificate from a HUD-approved agency must be presented to the lender before it can order the appraisal and begin processing the loan application. Face-to-face sessions and counseling via the telephone are available, and sessions cover the financial implications of HECM loans, alternatives to HECM financing, typical costs required to originate HECM loans and repayment conditions.

HECM loans also may be refinanced into another HECM loan, and many borrowers have done this to take advantage of lower interest rates or house-value appreciation. In addition, the HECM for Purchase loan program allows qualified seniors to use HECM proceeds for the purchase of a new principal residence. 

Costs and fees

Loan origination fees are typically higher on HECM loan transactions. If a home if worth less than $125,000, a lender may charge as much as $2,500. If the value is higher, the fee is limited to 2 percent of the maximum claim amount (the lesser of the appraised value or the FHA maximum mortgage limit for a one-unit property in that area) as much as $200,000 in value, and then 1 percent of the amount over $200,000. Fees cannot exceed $6,000. These fees are negotiable, and reduced origination fees have been used to attract more business.

To address concerns about high upfront costs for originating HECM loans, HUD introduced the HECM Saver program in September 2010. Under the standard HECM program, the initial mortgage insurance premium (MIP) is 2 percent of the maximum claim amount. The HECM Saver program reduces this initial MIP to only 0.01 percent of the maximum claim amount. The amount of money available, however, is lower by an amount that will vary by the terms of each loan (generally 80 percent to 90 percent of what a standard HECM borrower could get).

The HECM Saver is attractive to homeowners seeking smaller amounts of funds and lower fees. The interest rates charged are typically lower than a home-equity line of credit, and if the borrower holds the HECM loan long enough, it could offset the initially higher closing costs.

The future of reverse

Reverse mortgages represent an attractive financing option for a growing demographic. There are thousands of baby boomers turning 62 who must improve their financial situations at a time of economic uncertainty.

The HECM program offers senior homeowners a way to augment retirement income, pay medical bills as well as real estate taxes and insurance, financially help their children and grandchildren, take vacations, and more. These loans help seniors get needed funds to continue living in the house and the neighborhood they have lived in for years. The time associated with taking HECM loan applications certainly may be greater than other loan types, but mortgage originators may find that few are as rewarding as reverse mortgages in terms of making a difference in people’s lives.

Originators considering entering this market should know that Bank of America Corp. and Wells Fargo and Co. recently decided to cease originating HECM loans, however. The major reasons cited for taking this action involved the issue of not being able to credit-qualify prospective HECM borrowers to make sure that they have sufficient resources to pay their real estate taxes and insurance premiums, as well as concerns about declining market values around the country. The failure of HECM mortgagors to pay their real estate taxes and insurance premiums is a growing concern.

To address this concern, HUD is expected to draft a proposed rule soon that will outline a preventative strategy on the issue of future property-charge delinquencies on HECM loans. This may include allowing lenders to assess prospective HECM borrowers’ financial status before the formal approval. Their income, assets, liabilities and expected HECM proceeds should be analyzed to determine if the borrower will have sufficient resources to meet their ongoing expenses, especially property taxes and insurance premiums.

The other main concern is declining values because HECM proceeds are based on a property’s current market value. Lenders have the option of assigning the mortgage to HUD when the outstanding loan balance reaches 98 percent of the maximum claim amount, however, which is the purpose of HUD mortgage insurance.

Other lenders likely will fill the void created by the loss of these two banks, so that senior homeowners will have an adequate number of originating lenders to choose from when they decide to get the HECM. Mortgage originators who know their way around this product can be ready to help seniors get the financing they need.


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