Financial need, attractive demographics and friendlier government lending guidelines make reverse mortgages an appropriate loan product for the U.S.' growing senior population, even as home prices fluctuate.
Traditionally, reverse mortgages have been aimed mostly at low- and medium-value properties. But newly raised government lending amounts and lower fees should make the loans more appealing to a greater number of seniors interested in increasing their monthly cashflow.
Originations of home equity conversion mortgages (HECMs) insured by the Federal Housing Administration (FHA) rose 6.4% in 2008 (115,176) over 2007. By comparison, originations of traditional ‘forward’ mortgages plummeted by more than 30% last year. Almost half of all reverse mortgages were originated in just the past two years – indeed, April saw the highest monthly origination total since the program began.
The growing financial needs of seniors, driven by unemployment, foreclosure avoidance and sharply reduced pensions and retirement accounts, combined with higher government loan limits and lower borrowing fees should drive origination growth even higher this year. The Housing and Economic Recovery Act of 2008 (HERA), passed last October, raised the lending limit on FHA-insured reverse mortgages to $417,000 nationally. Before the change, lending limits varied by locality; in many low-priced areas, the lending limit was as low as $200,000.
The latest forecast by the Department of Housing and Urban Development (HUD), which oversees the HECM program through the FHA, estimates that 2009 originations will be a full 40% higher than 2008's volume.
These days, more Americans are reaching retirement age with more mortgage and personal debt than ever before, putting unprecedented pressure on them to stay current on their loans. The Center for Retirement Research calculated that 43% of working households are in danger of having too little income to fund their retirement needs. According to a survey conducted by AARP – a strong proponent of reverse mortgages – 36% of middle-aged and older Americans stopped putting money into their retirement accounts in 2008, and 17% made early withdrawals from a retirement account.
Reverse mortgages are, thus, becoming more attractive, as retirees consider home equity as a reliable income source – an option many did not want to consider before, perhaps, but now must. In order to qualify for a government-insured HECM, the homeowner must be at least 62 years old. The size of the loan for which the borrower would qualify is based on the amount of equity in the property and the age of the borrower – generally, the older the borrower, the greater the equity, and the lower the interest rate, the bigger the loan.
Unlike a regular forward mortgage, in which the borrower pays the lender back, in a reverse mortgage, the lender pays the borrower, up to the size of the loan. Contrary to what many people assume, this is not a one-size-fits-all product. Borrowers may pick one of five separate payment plans, ranging from equal monthly payments for as long as at least one of the borrowers lives, to a line of credit, which the borrower draws down as needed until the line is exhausted.
HUD requires that borrowers make any necessary repairs to the property using proceeds from the loan, but repairs can be made after closing using funds the lender ‘sets aside.’ To ensure that seniors are well informed and understand the features, benefits and drawbacks of an HECM, they must participate in a consumer information session given by an independent FHA-approved HECM counselor.
A loan application cannot be taken by the lender until the potential borrower has a counseling certificate. There are no credit qualifications or asset or income verifications, and closing costs may be financed as part of the transaction.
Unlike ordinary home equity loans, a HECM insured by FHA does not require repayment, as long as the home is the borrower's principal residence. The lender receives principal and all interest on the loan when the borrower moves or dies and the home is sold. Any remaining equity in the home is paid to the borrower or his heirs. If the sales proceeds are insufficient to pay the amount owed, FHA pays the lender the difference.
New lending guidelines
While the sharp drop in home prices nationally will no doubt prevent many prospective HECM borrowers from qualifying for a reverse mortgage, due to lack of equity, recent changes to the government lending guidelines should more than compensate and promise continued robust origination volume.
Under HERA, HECMs are more attractive (i.e., cheaper). For example, the law reduced the maximum origination fee on reverse mortgages to 2% on the first $200,000 of the home's value and 1% on the balance thereafter, with a total cap of $6,000.
Previously, the fee was capped at 2% of the home's value or the county lending limit – whichever was lower. Based on the previous fee structure, a loan at the maximum of $625,500 would have incurred an origination fee of more than $12,000.
In addition, the new law allows borrowers to use an HECM to finance the purchase of a new home. Homeowners may now use HECM proceeds to pay the difference between the down payment and the sales price of a new home. This opens the HECM market to an even greater audience, such as people looking to downsize into a smaller home while retaining more cash for retirement expenses. HECM borrowers would, thus, be able to take advantage of today's lower home prices.
Demographic trends have always been compelling for strong growth in the HECM program, and that is still true today, despite the drop in home prices. Currently, there are 34 million Americans aged 65 or older; by 2030, that number is expected to more than double, to 71 million, or 21% of the population. Moreover, there are presently more than 12 million seniors in the U.S. who have complete equity in their homes, owning an estimated $4 trillion in equity. That is a lot of collateral to be tapped.
In addition, awareness of the reverse mortgage product is widening. According to surveys, although only 1% of seniors have a reverse mortgage, 70% know about them, thanks to widespread advertising of the product on television and in other media. Moreover, among Baby Boomers gaining eligibility for reverse mortgages, there is, if not a comfort level, then certainly a familiarity, with debt financing, such as through home equity loans. For these people, it will not seem unusual to tap their home equity – in this case, in reverse – to help pay for living expenses in their remaining years.
An AARP report released last year said that Baby Boomers nearing retirement, unlike previous generations, will find that housing equity will make the difference between a difficult retirement and one that generally maintains their pre-retirement living standards.
Clearly, reverse mortgages represent one of the few bright spots for mortgage brokers today.
Brokers must be FHA-approved to originate HECMs and other FHA-insured mortgage loans, and two different levels are open to them. An FHA-approved loan correspondent can originate and process HECMs and other FHA loans. Underwriting is done by a sponsor, and the loans can be closed by either that sponsor or the broker-correspondent.
The other level of FHA approval is HUD mortgagee. These lenders can process, underwrite and close loans in their own names. However, at some point, they must qualify for FHA direct endorsement for reverse mortgages. A mortgagee can also contract with another mortgagee to be their agent in processing and underwriting HECM loans.
The unique composition of the reverse mortgage mandates that providers have a different skill set than required for traditional, forward loans. In addition, traditional mortgage loan software does not work for reverse mortgage servicing. The best bet for many lenders will be to partner with an agile and experienced origination and servicing or subservicing system.
Notwithstanding some expected bumps in the road, reverse mortgages will become more prominent as the demographic demands for this product expand. Those lenders and brokers knowledgeable of its product parameters, regulations and senior borrowers' concerns will ride the wave successfully.
Robert D. Yeary is chairman and CEO of Reverse Mortgage Solutions Inc., based in Spring, Texas. He can be reached, at firstname.lastname@example.org.