The number of federally insured reverse mortgages made in the United States last year jumped 77 percent, and legislators and lenders are bracing for another huge increase in 2007.
The Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, insured 76,351 Home Equity Conversion Mortgages (HECMs) in 2006 compared with 43,131 for 2005. The HECM is the most popular reverse-mortgage program and accounts for nearly 85 percent of the reverse market.
A reverse mortgage is a loan against a home that is not payable until the homeowner dies, sells the home or permanently moves out of the home. Reverse mortgages allow homeowners age 62 and older to turn the equity in their home into cash without having to move or make a monthly mortgage payment. There is no minimum credit or income requirement to qualify for a reverse mortgage.
“More seniors are recognizing that traditional retirements tools, such as IRAs, pensions and 401(k)s are not providing sufficient income to help fund everyday living expenses and healthcare,” said Peter Bell, president of National Reverse Mortgage Lenders Association. “Through proper education, more retirees are recognizing that the home they have lived in for so many years can now take care of them by using a reverse mortgage to access the equity accumulated over 20, 30, 40 years to help them live more comfortably.”
The U.S. House of Representatives recently passed a bill that would temporarily suspend the cap on the number of HECMs that can be insured by FHA. A companion bill in the Senate is expected to be considered soon. Currently, FHA cannot insure more than 275,000 HECMs, and some industry officials say 120,000 new reverse mortgages this year is a realistic number.
In an effort to capture even more reverse-mortgage customers, New York-based BNY Mortgage Co. has introduced a new product nearly identical to the current HECM with a slightly lower interest rate. The company’s HECM 100 product allows a 70-year-old homeowner, with a home valued at $300,000, to receive approximately $13,000 more in borrowing capacity than the traditional HECM loan. At today’s interest rates, the homeowner will save approximately $28,000 in interest costs over the expected life of the average loan.
BNY Mortgage Co. is a joint venture between EverBank and The Bank of New York. It operates as an originator and servicer of reverse-mortgage loans and has wholesale partners throughout the United States.
“BNYMC’s introduction of the new HECM 100 product is wonderful news for senior homeowners because it offers the consumer more money at lower costs,” said Meg Burns, HUD’s director of single-family program development. “This is exactly the kind of product innovation the reverse mortgage industry needs in order to help older homeowners live a more comfortable and financially secure life.”
The Santa Ana, Calif., metropolitan area displaced Los Angeles as the top reverse-mortgage market in the country with 5,825 loans funded (compared with 3,067 in 2005), followed by Los Angeles (5,758, up from 3,915); Sacramento, Calif. (3,625, compared with 2,161); Coral Gables, Fla. (3,577, up from 1,387); San Francisco, Calif. (3,353, compared with 2,040); New York City (2,492, up from 1,454); Fresno, Calif. (2,461, compared with 942); Phoenix (2,438, compared with 720); Boston (2,263, up from 1,148); and Denver (1,947, compared with 1,515 in 2005).
NRMLA, which has seen its lender membership grow from 370 firms in 2005 to 500 in 2006, attributes the explosive growth in reverse mortgages to several factors. Topping the list have been a decade-long run-up in home appreciation rates in many parts of the country allowing seniors to access greater amounts of equity, more lenders offering the product and greater acceptance of reverse mortgages as a wealth management tool.
Brian Montgomery, who serves as FHA commissioner and assistant secretary of Housing at HUD, said that he anticipates reverse mortgages will one day be as commonplace as 401(k)s and other retirement planning tools.
“HUD has gone to great lengths to educate community leaders and senior advocates about the potential benefits of reverse mortgages, which has helped make more people comfortable with recommending the product to their elderly clients,” NRMLA’s Bell said. “I think Commissioner Montgomery deserves as much credit as anyone for helping to make reverse mortgages a more mainstream financial planning tool.”
Tom Kelly’s book “The New Reverse Mortgage Formula” (John Wiley & Sons) is available in local bookstores and on Amazon.com. Tom can be reached at email@example.com.