New Rules for REVERSE MORTGAGES

New FHA Rules for Reverse Mortgages Borrowers are rushing to lock in reverse mortgages ahead of changes next month intended to strengthen the loan program for seniors but that will also reduce its popularity. "It has been a madhouse," said Helen Taylor, program director at the Northeast Denver Housing Center. "I am getting about 20 to 25 calls a day." Taylor, who conducts the mandatory counseling required to get a reverse mortgage, is hearing from applicants eager to qualify under existing rules rather than the ones coming Tuesday. Those changes, detailed in a letter from the Federal Housing Administration, include a 15 percent reduction in the maximum amount a borrower can access via a reverse mortgage. The FHA will also begin collecting 2.5 The Denver Post's reporters and editors offer news, analysis and commentary on the latest business, real estate, tourism, gambling and technology news in Colorado. percent of the home's value in an upfront mortgage-insurance premium rather than the 2 percent it has charged for those taking out 60 percent or more of their proceeds in the first year of a loan. And starting Jan. 13, borrowers will have to pass a financial assessment to measure whether they can handle insurance and property-tax payments. If not, funds will be set aside to cover those costs and prevent a default. "The changes coming down the pike are huge, and they will change how the business is done," said James Spray, an Arvada mortgage lender who specializes in reverse mortgages for home purchases. Spray expects the changes will cut his business by about a fifth, but he has heard from others in the industry who are expecting much larger reductions and are planning to get out. Reverse mortgages, also known as home-equity-conversion mortgages, allow a borrower to tap their home equity as a monthly payment or a line of credit. The program, around since 1989, is available to people ages 62 and older. A key goal of the reverse-mortgage program is to allow seniors to stay in their homes as long as possible, which has a larger societal benefit, said Rick Garcia, regional administrator of the U.S. Department of Housing and Urban Development's Region VIII, which covers Colorado and five nearby states. The Federal Housing Administration backed 1,072 reverse mortgages in Colorado and 54,676 nationwide in the last full fiscal year, which ended last Sept. 30. Those totals are down by about half from the peak seen in 2009 because of earlier changes in the program and a weaker housing market. Hedging against losses from reverse mortgages is difficult because it requires predicting two things correctly: how long a borrower will hold the loan and the direction of home prices. "We are trying to ensure the longer-term solvency of the fund," Garcia said. In 1990, the average age of a person taking out a reverse mortgage was 76.7. Last year, it had fallen to 71.9. Technically, a reverse mortgage doesn't have to be repaid until the borrower moves out or passes away. But younger borrowers are more likely to move than "age in place," and more of them have gone into default. Because of the unprecedented decline in home values during the housing bust, the FHA has found itself holding the bag for bigger losses than expected, depleting its insurance fund. "They have the new borrowers paying for the sins of the past borrowers," said Donald Opeka, president of Orion Mortgage in Broomfield. In the early days of the program, many borrowers turned to reverse mortgages to free up cash for spending, a use that declined with the equity available in homes. With more people carrying mortgages into retirement, reverse mortgages have increasingly been used to eliminate monthly loan payments, lenders said. Opeka said one client had a $1,200 monthly mortgage payment while collecting $1,400 a month in Social Security, an untenable situation. An inheritance allowed her to take out a reverse mortgage and stop the payments. "She has a chance of living in the house and staying there the rest of her life," he said. Some borrowers use the mortgages as a line of credit that prevents having to tap other money sources when conditions aren't favorable. At the other extreme are those who turn to reverse mortgages in desperation. "Seniors who shouldn't have gotten the mortgage got it," said Jim Veale, a senior vice president with Security One Lending in Lakewood, Calif. Veale said more people are retiring with heavy debt burdens that leave them unable to meet even the most basic requirements of covering insurance and taxes. Their defaults are what have depleted the reserve funds designed to protect taxpayers, although Garcia said the default rates on reverse mortgages are comparable to those on loans under other FHA programs. There had been hope within the industry that the reverse-mortgage program could make it over the hump without a bailout, but Friday the FHA requested $1.7 billion to shore up its long-term finances. Veale said there will need to be a major shift in how the loans are perceived and marketed, not as a loan of last resort but as a financial-planning tool. "We know we won't be able to help the most needy any longer," Veale said.

Move Forward in Reverse - lock in home values

What if home values continue to decline? Reverse mortgages have helped people capture the value of their home during a declining market. People that took out a reverse mortgage three or more years ago received equity from their homes that has now evaporated. So if a reverse mortgage makes sense for someone today it might be time to move forward to lock in the value.
While several large banks have left the reverse mortgage industry and many people are misinformed about the product now might be a good time to investigate how this program can be a valuable tool.
Often times the most valuable asset people have are their homes. For people over 62 the reverse mortgage allows them to tap into this asset. Home equity has been falling since its peak in 2007. Despite this decline the National Reverse Mortgage Lenders Association estimates there is $3.2 trillion in equity sitting out there that is untapped.

The Time is RIGHT
While reverse mortgages continue to be used by a tiny percentage of eligible homeowners it might be a good idea to talk to your financial planners or family members and lock into the program.
1. If you have a home that's worth more than $417,500 the temporary loan limit of $625,000 is set to expire at the end of 2011.
2. The future of the program is uncertain, all government programs are subject to deletion.
3. The reverse mortgage can provide funds necessary for anyone who is laid off or having financial difficulty in this weak economy.
4. Look at the reverse mortgage as a way to lock in the home's current value and protect the equity

Earlier this year Ginnie Mae, which purchases reverse mortgage-backed securities, tightened the standards for these loans. Loan volume has continued to fall since it's peak in 2008.

With the introduction of the new financial assessment due out in the coming weeks it is going to become more difficult for those "in need" seniors to receive a reverse mortgage. This assessment will try to evaluate whether or not the borrower will be able to continue to pay their property taxes, homeowners insurance and maintenance on their homes before they grant the loan.

Who Qualifies?

The homeowner(s) must be at least 62 or better and the home must be their primary residence. They can not be delinquent on any federal debts but can have a small mortgage on the home that will be paid at closing. All the criteria for the loan is based on home value so the guidelines for this loan are not the same as a conventional loan. However, HUD counseling or reverse mortgage education is a mandatory requirement for the loan. This helps the borrower understand the loan and avoid being taken advantage of by an unethical lender.

There are two types of loans to choose from. The fixed rate provides the largest amount of equity you can receive from the reverse mortgage but all the proceeds must be taken at closing. Thus you begin paying interest on that amount as soon as the loan funds. This loan makes sense if you have a large mortgage or other debts that need to be paid. The second is the adjustable rate loan that provides you with many options such as tenure (a dollar amount for the rest of your lift) term (a set amount for a number of years) a line of credit that actually grows in value or a combination of any of the programs. The line of credit is a great way to have money accessible to pay taxes, medical bills etc. without having to pay it back. It also grows by 4% which is the opposite of the market value of the home. All the proceeds from the reverse mortgage are TAX FREE!!!!

As long as one of the homeowners remain in the home the loan is not due and payable. Not until the last borrower leaves the home by death or disability does the family need to start looking into selling or refinancing the home. Once that event occurs the loan must be repaid, with interest. Any money remaining after the loan is satisfied goes to the borrowers or their heirs.

An example of the application of this product was a 77 year old lady in Arizona that took out a reverse mortgage to purchase a home for her daughter down the street from her so that she could help take care of her. The daughter now had a mortgage -free home and lives near enough to care for her mother.

Recently FHA introduced the Saver Loan. The good news is that the upfront costs of the loan are greatly reduced but so is the amount you can borrow. In some cases you will also pay a slightly higher interest rate. The volume of these Saver products has more than doubled since January. They are now about 10% of all new reverse mortgages according to John Lunde, president of Reverse Market Insight. It seems borrowers are getting younger and utilizing the product for retirement planning.

While home equity may have declined from it's peak, smart planning can allow people to fund their retirement by tapping into it.

New Reverse Mortgage Product Saves Seniors Money

I've been doing reverse mortgage for over five years and one of the largest drawbacks of the loan was the upfront origination and servicing fees. This has made this a very expensive loan. I'm very proud to say I work for the first lender to listen to the concerns of seniors and eliminate those fees. Origination fees were 2% of the appraised value or a minimum of $2,500. While the servicing fees could be as much as $5,300 based on the borrowers age. So the savings could amount to $8,000 or more. The interest rate is 5.56% and is a fixed rate.
This loan is a great product for someone who wants to eliminate their mortgage payments, help out their children, remodel their home, make their home accessible, pay for medical expenses and/or homecare, travel, purchase a new home or diversify their assets.
This is the loan of the future and with the new product making it more affordable I can see reverse mortgages become part of the mainstream mortgage industry.
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