Most reverse mortgage options have left the market, victims of the global credit crunch. Yet the biggest player with the longest history still remains, and it pushed the industry into positive growth territory for the 19th straight year.
While the 4.3 percent increase in the number of FHA-insured Home Equity Conversion Mortgages (HECMs) was down significantly from previous years, it bettered the negative numbers of conventional, or "forward," loans. The Federal Housing Administration is a component of the Department of Housing and Urban Development and now the main player in the conventional (forward) and reverse mortgage market.
"One reason for the lower HECM volume was the uncertainty over the loan limits," said Peter Bell, president of the National Reverse Mortgage Lenders Association, a nonprofit trade group based in Washington, D.C. "There were so many people waiting on the sidelines to see what would happen." Why would you want to close a loan a few weeks ago when you’d be borrowing less and at a higher interest rate? Bell asked.
A reverse mortgage enables senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.
Lenders and consumers have been pushing for the common ceiling, known as the Single National Limit, for more than a decade, arguing that the longtime method of assigning limits by area for HECMs was too restrictive. All interested parties had been waiting for clarity on a figure — whether the Single National Limit would be set at $417,000, $625,500 or a sliding scale somewhere in between.
About three months ago, Congress gave HECMs, which make up more than 90 percent of all reverse mortgages, a common loan ceiling of $417,000, regardless of location. Previously, the HECM program assigned different lending limits by county ranging from $200,160 in rural areas to $362,790 in the highest-home-value areas. The new, higher lending limit will enable borrowers to obtain a substantially greater benefit from their homes, if the value is higher than the previous HUD limit.
Similarly, existing borrowers whose home value is greater than the new HUD limit may be able to increase their benefit by refinancing their reverse mortgage. They are encouraged to contact their lenders to weigh fees and costs to determine whether it makes sense to refinance.
Lenders vow to push vigorously to lift the ceiling to $625,500 as soon as possible, especially given the exit of all "jumbo" reverse mortgage products. Jumbo reverses, especially helpful to homeowners with expensive homes, had been available since 2000 when Financial Freedom introduced its Cash Account reverse mortgage. Since then, jumbo products brought to market by Seattle Mortgage (acquired by Bank of America), Senior Lending Network, Sun West Mortgage Co. and Bank of New York (now Metlife) and others were beginning to pick up momentum and a sliver of market share — until last summer.
The credit crisis has decimated the jumbo reverse market. Wall Street investors not only were shy about buying loans secured by real estate, but they were also opposed to acquiring jumbo packages. Lehman Brothers, which filed for bankruptcy protection in September, was the world’s biggest supplier of jumbo reverse mortgage funds. The Senior Lending Network was offering its Equity Plus Advantage program and its Simple 60 plan (minimum age 60 years, rather than 62) until late October when its Belgium-based parent, KBC Group NV, announced an open-ended moratorium on the products.
Also screeching to a halt were the Rex Agreement and Equity Key, financial contracts whereby the homeowner trades a portion of future equity for a cash payment today. They are intriguing options for savvy investors who believe they can realize a greater return on investments than on home appreciation. The Rex Agreement was backed by troubled insurance carrier AIG.
Equity Key is similar to the Rex Agreement. The main differences are that the Rex Agreement has no age restriction, while Equity Key is aimed at homeowners between the ages of 65 and 85 and was available on second homes and investment properties. The Rex Agreement was not available for second homes and investment properties.
Former FHA Commissioner Brian Montgomery said there is a bright future ahead for reverse mortgages, despite the current credit crunch. He has tried to convince his mother to take out a reverse, but she, like many seniors, has been suspicious of the concept.
"I told her that I was her son and would always be looking out for her best interests," Montgomery said. "I also told her that I administered the program for the United States of America and thought it was a pretty good idea."
Now, that’s a recommendation.
Next week: Finally a government-insured reverse mortgage for home purchase.
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