Reverse Mortgage Guide

The National Association of Realtors is predicting that “existing-home sales are projected at an annual pace of around 4.9 million in the first half of this year, rising notably to 5.8 million in the second half, and totaling 5.60 million for all of 2009. The aggregate existing-home price should decline 1.2 percent in 2008 to a median of $216,300, and then rise 3.2 percent to $223,200 in 2009.”

This, of course, is all fun and fantasy. No one knows what will happen in the future, certainly a lot of bright people did not predict the current housing downturn, otherwise their employing banks and stock brokerages would not have blown through billions of dollars.

For seniors, the core issue is home value. You want home values to rise faster than inflation so that equity grows and buying power increases. Then, if a sale or reverse mortgage is of interest, you have a bigger asset to market or finance.

NAR adds the following predictions:

*The 30-year fixed-rate mortgage is forecast to rise slowly to the 5.9 percent range in the fourth quarter, and then average 6.3 percent in 2009.

*“Affordability conditions are anticipated to rise 14.2 percent this year, permitting more people to become homeowners, but buyers should avoid aggressive lenders and not over-stretch to enter the market,” Lawrence Yun, NAR’s chief economist, said. NAR’s housing affordability index is expected to rise from 113.0 in 2007 to 129.0 in 2008.

*Growth in the U.S. gross domestic product (GDP) is projected at 2.2 percent in 2008 and 2.7 percent in 2009. The unemployment rate should rise to 5.4 percent in the second half of 2008 before averaging 5.2 percent in 2009.

*Inflation, as measured by the Consumer Price Index, is seen at 2.7 percent this year and 1.4 percent in 2009. Inflation-adjusted disposable personal income is likely to grow 1.7 percent in 2008 and 3.5 percent next year.

The March issue of Kiplinger’s Personal Finance magazine has an interesting article regarding reverse mortgages entitled “A New Mortgage Mess on the Way?”

“As the industry grows,” says the magazine, “some see eerie parallels to the subprime mess roiling the country. Could reverse loans become the mortgage scandal of the next decade?”

The concerns, says Kiplinger, “include misleading marketing tactics and, worse, pressure to buy inappropriate insurance products with the proceeds of the loan.”

In other words, annuities.

The magazine also says that most borrowers are satisfied with their reverse mortgage and that a growing range of reverse mortgage products are available as additional lenders enter the marketplace.

I think there is a substantial difference between the general mortgage meltdown we are now seeing and reverse mortgages.

The core issue with toxic loans is that they are written in such a way that higher costs are assured — but the ability of borrowers to repay is not. With reverse mortgages you have non-recourse financing, meaning that the owner’s obligation is limited to the value of the property. If the loan is not fully repaid, that’s typically a matter for the lender and HUD to hash out.

That said, there plainly needs to be better oversight with regard to sales practices, related sales and counseling. The idea that lenders can pay for counseling is an obvious and overt conflict. Or, as Kiplinger gently puts it, “sometimes counseling is paid for by the lender, raising questions about impartiality.”

The entire article, “A New Mortgage Mess On The Way,” can be found in the March 2008 issue.

So far it’s just an idea on Capitol Hill, but if passed a Senate bill would significantly impact reverse mortgage originations.

S. 2490 — the Reverse Mortgage Proceeds Protection Act — was introduced in December by Sen Claire McCaskill(D-MO). The bill would get to an issue we have repeatedly noted — the use of reverse mortgages to ultimately fund high-cost annuities with steep prepayment penalties.

The legislation specifically provides that “not later than 6 months after the date of enactment of the Reverse Mortgage Proceeds Protection Act, the Secretary shall, in consultation with other relevant Federal departments and agencies, promulgate regulations to help protect elderly homeowners from the marketing of financial and insurance products not in the interest of such homeowners, including the marketing or sale of an annuity as a condition of obtaining any home equity conversion mortgage. In developing the regulations required under this subsection, the Secretary shall consult with consumer advocates (including recognized experts in consumer protection), industry representatives, representatives of counseling organizations, and other interested parties.”

It’s important to say that we have had several loan officers who have said that they are specifically prohibited from selling annuities in connection with reverse mortgages. If you are a loan officer with a similar standard please feel free to add your name to the list.
For background, see:

Should This Retiree Grab An Annuity?

Another Tale of Woe

How To Stop The Rip-Offs

AARP, a strong reverse mortgage proponent, is taking part in the stimulus package debate.

Bill Novelli, AARP’s CEO, has issued a statement in response to a federal economic stimulus proposal offered by Senate Finance Committee Chairman Max Baucus.

Please read it, and then consider the questions which follow:

“Chairman Baucus understands that Americans of all ages are feeling financial pressure and can play a role in stimulating the economy.

“In addition to tax rebates, the Baucus stimulus proposal would help approximately 20 million older Americans who primarily depend on Social Security for retirement income. This plan would also enhance unemployment insurance, which is especially important for older workers who have a more difficult time finding new employment after a job loss.

“The Baucus plan improves on the House proposal in two key ways: it puts money into the hands of people who will more quickly put it back into the economy, and it targets those Americans who need it most. It is more timely, targeted – and fair.

“Over the last two weeks, leaders in Congress and the Administration have shown us what is possible when they break through partisan gridlock to solve our nation’s problems. We hope that they continue this bipartisan spirit and act upon the improvements in Chairman Baucus’ fair and effective economic stimulus proposal.”

How many of you agree that the stimulus plan, if enacted, will prevent a recession or reduce the severity of a recession?

How many think the stimulus package may actually encourage inflation?

Will the stimulus package, if passed, help or hurt reverse mortgage borrowers? How?

Please enter your comments below.

Here’s a question I get quite often from potential reverse mortgage clients: “What happens if my spouse has not yet reached the age of 62? You say that all borrowers have to be at least that age to get most reverse mortgages.”

Yes, indeed that is correct. All borrowers on the deed at the time the reverse mortgage is originated must be at least 62 years old to get an FHA-insured HECM reverse mortgage. From time to time, a couple will decide that it is in their best interest to pursue a reverse mortgage even though one spouse is not old enough.

In such a case, can we help them?

The answer is yes, but the borrowers must understand the significance and what must be done to achieve this. The younger spouse may be completely removed from the deed, or in some cases a new deed which is called a “life estate deed” is prepared. This life estate gives a future interest in the property to the younger spouse, essentially saying that if the older person passes away, the younger one automatically becomes the owner.

Sounds easy, right? No so fast, kids,….it is imperative that all parties concerned to understand the implications of changing a deed.

As a loan originator, I insist that my borrowers obtain legal counsel on this matter to be sure that they fully understand how this move may affect them in the future. In the case of a life estate deed, what if the older spouse dies and the younger spouse is not old enough to obtain a reverse mortgage or not qualified to obtain a “forward” mortgage? And if the younger spouse is removed completely, what provisions are in place for the protection of the younger spouse? With proper guidance and planning from a qualified attorney, this can be accomplished to the satisfaction of all involved and the reverse mortgage can be completed.

My advice for anyone considering a case such as this is to schedule a consultation with an experienced reverse mortgage consultant and an elder law attorney of your choice. This type of advice can make for a smooth transaction – and no surprises down the road.

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Contributor Sue Haviland, based in Baltimore, MD has been a reverse mortgage specialist for more than five years.

Remember FHA modernization? Both the House and the Senate passed modernization bills last year, but there has been no final measure between the two congressional chambers. For reverse mortgage borrowers this is a concern and a loss.

Here’s why:

Under the Senate bill, S. 2338, the origination fee for HUD-backed reverse mortgages — HECM financing in HUD-speak — would be limited to 1.5 percent of the mortgage amount.

While absent from the House bill (H.R. 3915), a cap on origination fees would mark an important advance for reverse loan borrowers in the sense that as reverse mortgages become more common — and as lenders and HUD gain experience — costs should come down unless there is statistical evidence to justify higher fees.

Both FHA modernization bills are now on the back-burner, in large measure because FHA loan limits may rise as a result of the stimulus package.

Alas, this may also mean the language concerning reverse mortgage origination fees is also gone.