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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2018

This Loan Can Open New Doors

A Home Equity Conversion Mortgage will help senior borrowers unlock the wealth in their homes

This Loan Can Open New Doors

Each day, some 10,000 baby boomers reach the age of 62, and all of them are trying to figure out the best way to fund retirement for the next 30 years or more. Fortunately, most of these seniors are sitting on a source of wealth: their homes.

In that light, it behooves originators to understand Home Equity Conversion Mortgages, the only reverse mortgage insured by the federal government. Having this loan in the product mix can help originators open up a new source of business revenue while also helping an entire generation of Americans to achieve their dreams.

We are beginning to see some interesting dynamics emerge in the current housing market as home prices continue to rise. In fact, recent research from Black Knight suggests that available equity in U.S. homes reached $5.4 trillion at the end of 2017, a record level and 10 percent higher than the peak reached in 2005.

At the same time, the supply of homes on the market has dropped to one of the lowest levels in U.S history, with the shortage affecting mainly starter and mid-priced homes. To further complicate matters, the country’s baby boomer and millennial generations (roughly neck and neck in size) generally want the same things in a home: You guessed it, that starter to mid-priced home. These two groups both desire relatively small and flexible spaces, low maintenance demands and walkable communities, among other features, according to Builder Magazine.

Given new home inventory will likely remain low, millennials and baby boomers probably will need to focus on purchasing and renovating existing housing stock or simply renovating an already-owned home to meet evolving needs. While there are a number of financing products available to both groups, boomers qualify for a loan that can help meet their specific financial and housing needs: the Home Equity Conversion Mortgage, or HECM.

The HECM is the only reverse mortgage insured by the federal government and is only available through lenders approved by the Federal Housing Administration (FHA). Mortgage originators who add this product to their toolkit can earn new business from past clients, as well as expand their existing base of clients and referral partners — such as real estate agents, financial advisers and other professional-services groups.

How it works

A HECM is a loan for homeowners 62 and older that allows them to tap the equity in their home to fund retirement and other needs. Borrowers are not required to pay back the loan until the home is sold or otherwise vacated, but they are obligated to remain current on property taxes, homeowner’s insurance and applicable homeowners’ association dues.

Mortgage originators who add this product to their toolkit can earn new business from past clients, as well as expand their existing base of clients and referral partners.

Failure to meet these requirements can result in a default on the loan agreement. Borrowers who wish to obtain a HECM must also undergo mandatory counseling with a U.S Department of Housing and Urban Development-approved counselor and undergo a financial assessment to ensure they can cover the cost of taxes, insurance and applicable homeowner association dues. With a HECM, borrowers retain the title to the home at all times.

For many seniors, a HECM can free up liquidity for purposes other than retirement costs. HECMs can help seniors age in place by allowing them to use loan proceeds to retrofit their current home with accessibility features. Alternatively, the added financial lift from a HECM might make it more feasible to buy a home closer to family or to an active adult community. The HECM for Purchase program allows seniors to purchase a new home using proceeds from the loan.

Why it’s attractive

The HECM offers a number of ways to access the loan proceeds, including tenure payments, term payments, a line of credit, cash or any combination of these. In addition to a HECM, some lenders also offer proprietary jumbo reverse-mortgage products, which can offer more flexibility than the traditional FHA-insured HECM.

These jumbo products are a good fit for higher-valued properties, with loan amounts up to $4 million. There is no mortgage insurance premium and no initial disbursement limitation. Borrowers take the full amount of available funds at closing. There are some limitations on approved properties and this product is not available in all states, but it’s worth looking into if you generally deal with higher-valued homes.

For many boomers, the HECM can be viewed as a key component within a comprehensive retirement plan, alongside 401(k)s, IRAs, Social Security and other income and asset resources. Having access to home equity gives borrowers an alternative funding source should their investments underperform. It also provides a funding source for insurance plans, including long-term care policies, without impacting household cash flow. In cases where the cost of insurance is too high, or borrowers don’t medically qualify for it, they can “self-fund” their long-term care risk with the HECM line of credit to be accessed if home-care is needed in future years.

More than 10,000 Americans per day are turning 62, making them eligible for this loan.

The HECM line of credit is the most flexible option to incorporate home equity for these and other retirement planning needs. The line of credit is guaranteed to grow and compound at a rate equal to the cost of funds, cannot be called regardless of what happens to the value of the home and has no term expiration or payments required. Once it is put in place, it grows and compounds for as long as the borrower lives in the property. When planning a 20- to 30-year or longer retirement, these assurances help to manage any risks to the long-term retirement-funding plan.

What it means for you

Let’s explore a few ways a HECM can help grow your business as a mortgage originator. More than 10,000 Americans per day are turning 62, making them eligible for this loan. All of them are trying to figure out how to effectively fund their lifestyles for the next 30 years or more. Opportunity exists to approach past clients about refinancing an existing mortgage into a HECM or moving to a new property by using a HECM for Purchase loan.

Instead of relying solely on millennial borrowers to finally pull the trigger on a home purchase, you also can establish new relationships with seniors who may benefit from a HECM by using it as an opportunity to create a new revenue stream. Real estate agents need a competitive edge with clients as much as you do. By teaming up to offer something different that enables a senior buyer to be competitive in the housing market, you’re adding value to your relationship.

Similarly, financial advisers, tax attorneys, certified public accountants and other professionals also need to continue to add value to their client relationships. Ensuring they are aware of how home equity can be used in retirement planning can help grow their business and yours.

•  •  •

While the HECM may not be the best option for everyone, educating yourself on the benefits of the product and how it can help today’s seniors live a more comfortable retirement can only benefit your mortgage origination business.


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