Getting a Handle on Reverse Mortgages
Will New Laws Affect the Reverse Mortgage Industry?
by Robert Trommler

What does the FHA modernization bill mean to the reverse mortgage industry?
In a word -- nothing at present. On February 12, president Bush signed into law the much-vaunted Economic Stimulus Act of 2008. This law provides for a temporary increase in FHA lending limits, which may be a relief to some anxious borrowers using conventional government loan programs.
However, a very popular and distinctly separate segment of the FHA loan programs, namely the reverse mortgage, was not part of that sweeping set of new laws.

As with any honest, hard working people in a chosen line of work, those of us in the reverse mortgage industry strive to maintain and improve the reputation of our craft. It is a constant battle to fight the good fight given the ready supply of horror stories about senior citizens being easy prey for those with less scruples.

There are still many examples of mortgage lenders sending out advertisements that imply that the recent Economic Stimulus Act of 2008 does change the lending limits for the FHA reverse mortgage program. This misrepresentation is an attempt to convince borrowers to refinance their existing loans before it predictably benefits them. (There are knuckleheads in every industry).

According to Peter Bell, president of the National Reverse Mortgage Lending Assn., the important provisions of the new legislation will address the following:
• A single national lending limit of $417,000.
• Use of the home equity conversion mortgage (HECM) as a purchase note.
• Use of the HECM for co-op properties.
• A new statutory maximum origination fee of 1.5% of the maximum claim amount.
Taken in order, each of the listed program improvements would benefit borrowers as stated.

Lending Limit Increase

A national lending limit would simplify the qualification process. At present, a borrower’s ability to qualify for the program is based on their age, prevailing program interest rates, and the equity available in their homes.

With the HECM program, equity is a function of the outstanding balance of their current mortgage and the loan program’s lending limit. As that limit increases, more loan proceeds become available to borrowers as long as their home appraises for more than the current limit.

Many senior homeowners who may be an ideal fit for the HECM cannot qualify because of FHA program lending limits in their area. It can be very frustrating as you can imagine. Consider the classic profile of a retired senior homeowner who is house rich and relatively cash poor. Their options can be severely limited without the income or employment criteria that lenders need to qualify them for a conventional cash-out mortgage.

An increase in the HECM limits could mean qualifying for a program that would pay-off their current note and stop that related payment for as long as they live out the property as their primary residence. The cash out of the HECM may be thin, but just making that home payment go away could put a lot of color in a black and white retirement picture.

Purchasing Property with a HECM

Part of the retirement strategy for many seniors is to downsize from the home where they raised their children and use a reverse mortgage to stop the payments after they take permanent residence.
This popular option has required the use of a conventional mortgage to purchase the new residence and replace it with an HECM. Although this is a very possible and common practice, it includes an additional step that would be eliminated if the HECM would permit the purchase in the first place.
All that’s required is a simple calculation on the front end of the transaction. The calculation would determine how much the borrower would need as a down payment to build equity through the purchase process in order to qualify for the reverse mortgage. It would require a bit more of an initial cash outlay to reach the needed equity ratio, but living in a new home with no payment can make that task much more attractive.

HECMs for Co-Op Qualification

Very few major lenders offer reverse mortgages on co-op properties because of the way a co-op is held in title. Instead of an owner holding title to a specific property, they are issued a share of the total facility. It is a challenge when an FHA HECM needs to be recorded as a lien on an individual residence. Determining ownership in this case has prevented these senior residents from having access to the HECM.

The senior community of Laguna Woods in Orange County is an example of the potential use that this improvement would offer. With an estimated 33% of the total 16,000 households in Laguna Woods being co-ops, residents could -benefit greatly from a co-op friendly HECM program.

Origination Fee Limit at 1.5%

One of the long-lived complaints about reverse mortgage programs is the fee and cost structure of the loan. However, when a program expert explains those related costs to a potential borrower, the fees can be understood and the concerns can be mitigated.

With most lenders charging an origination fee of 1.5% to 2%, the total loan fee would obviously rise along with an increase in the lending limit. This detail is one of the wrinkles that have yet to be ironed out in Congressional discussions. The FHA needs to continue to make this loan attractive for lenders to offer, but it also needs to consider what range of fees and costs can realistically be bourn by the public.

In summary, the reverse mortgage’s version of the Economic Stimulus Act is not yet official. Some believe it may not become law at all. With the aging profile of the United States population, it’s clear that many Baby Boomers and retirees are looking for intelligent and responsible options to help fund their retirement years.

Although an HECM reverse mortgage may not be appropriate for every senior homeowner, it still offers a financial alternative that can make sense in the right situation and may become even more attractive if the listed improvements are made. Stay tuned.
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Robert Trommler is a reverse mortgage consultant. He can be reached at 949-809-2597.