Seniors: it's OK to think in reverse
Home Equity Conversion Mortgages grow
November 25, 2009
By Tom Kelly
Inman News®
"You won't really know unless you ask."
The popular phrase has been used often in many households -- especially when kids seek an answer for being left off a team, when wage earners wonder about a possible salary increase, or if carpool drivers can shift to a different day.
The question can also spark critical conversations in senior households when times are tough and cash is tight. For example, will a lender with a second mortgage on a property "subordinate" its position so that a Puget Sound, Wash., couple could obtain a reverse mortgage, avoid foreclosure, and remain in the home they built 40 years ago?
While there is still no hard data to show the number of reverse mortgages that are helping seniors avoid foreclosure, recent local examples continue to support other national anecdotal evidence.
The local case involved an 81-year-old couple who took out a second mortgage two years ago to help their daughter buy a home. The daughter agreed to make the payments on the loan. Unfortunately, she lost her job and was no longer able to make the monthly payments. As a result, the homeowner became delinquent on both their first mortgage and their second mortgage. They subsequently received a notice of foreclosure on their first mortgage.
"The couple inquired about a reverse mortgage," said Sara Hulbert, chief executive officer for Senior Financial Corp., a reverse-mortgage specialist. "But the only way we could get it to work was to have the lender with the second mortgage agree to work with us."
While it is rare for a lender with a second lien on a property to agree to "remain in second place" by allowing a new loan -- especially a reverse mortgage -- to take over the first lien position, the couple had been long-time customers and needed the help to make the deal work.
Here's how the reverse mortgage solved the dilemma: The couples' home value was $235,000 and encumbered by a first mortgage in the amount of $140,000 and a second mortgage of $60,000.
After fees, the couple was eligible for a reverse mortgage of $171,000. When the reverse mortgage closed, the first mortgage was paid off and the remaining $31,000 brought the second mortgage current and also bought down a significant portion of the balance.
The homeowners chose an FHA-insured Home Equity Conversion Mortgage (HECM) with a fixed rate of 5.56 percent. The HECM is the nation's most popular reverse mortgage program, generating about 85 percent of all reverse mortgages in the United States.
Other private reverse mortgage "jumbo" funds have virtually evaporated given the present credit crisis. The Federal Housing Administration, a component of the U.S. Department of Housing and Urban Development, has also become more of a primary player in the "forward" or conventional mortgage markets.
More than 470,000 HECMs have been made since 1989, the year FHA launched its reverse mortgage pilot program. FHA insured approximately 112,000 HECMs in fiscal 2008, up from 107,367 HECMs in 2007 and 43,131 in 2005.
A reverse mortgage historically has enabled 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.
The flexibility of the reverse mortgage was increased late last year when The Housing and Economic Recovery Act of 2008 approved the HECM for purchase program. The move allows older homeowners to make a large down payment on a new home and then utilize the reverse mortgage as permanent financing.
The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home's value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of your home's value or the county lending limit, whichever was lower.
"These people built the house 40 years ago and had no intention of ever leaving it," Hulbert said. "They were so concerned and really had no other place to go. The reverse mortgage allowed these people to age in place in the home that they love. They just didn't know what was possible."
You never know unless you ask.
Tom Kelly's book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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