The checkered beginnings of reverse mortgages made them a difficult sales proposition to seniors. In the early years, some programs gave the lender a bigger share in the home than the homeowner, the amount of available money that could be tapped was too low, and the fees were too high.
Toss in the fact that seniors are wary by nature, often have little to risk, and view paying off the roof over their head as the ultimate measure of success and pride.
Now, many of the chuckholes on the road to reverse mortgage acceptability have been filled. If you doubt that, simply check with the investors on Wall Street, who are more than willing to pay a premium to buy these assets, creating a secondary mortgage market for the once-orphaned loans.
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment.
Reverse mortgages are available to individuals 62 and up who own their home. Funds obtained from the reverse mortgage are tax-free.
The biggest lift to reverse-mortgage credibility came in 1989, when the Federal Housing Administration agreed to insure the Home Equity Conversion Mortgage (HECM), which not only allowed owners over 62 to stay in their homes for as long as they wished but also protected the owner in the event the lender went out of business.
HECMs now account for nearly every reverse mortgage written today. Other private reverse-mortgage "jumbo" funds have virtually evaporated given the present credit crisis. More than 130,000 HECMs were originated last year.
AARP reported that approximately 93 percent of applicants were satisfied with the process.
The next boost for reverse mortgages toward acceptance was a single national loan limit (presently $625,500) and then onset of fixed-rate products (presently about 5.5 percent).
However, not every homeowner qualifies for the maximum. A borrower’s age, along with prevailing interest rates, determine the actual amount of the HECM. Older borrowers qualify for the greatest amounts.
The Housing and Economic Recovery Act of 2008 approved the HECM for purchase program. The move allows older homeowners to make a large downpayment 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 the home’s value or the county lending limit, whichever was lower.
However, given investors’ appetite for reverse mortgage securities, many of those fees have been eliminated or significantly reduced. Why did this happen and what does it mean for consumers?
In a nutshell, Wall Street sees reverse mortgages as a more predictable asset class, and the mortgages have finally reached a supply threshold that allows for group discounts to lenders — many of whom pass the savings on to consumers.
For example, national lender Seattle Mortgage offers several new products on the fixed-rated HECM:
- No servicing fee (approx $3,000 in additional cash available).
- Reduced upfront mortgage insurance premium (can be up to 2 percent of claim amount).
- No origination fee/no servicing fee (equal to up to $6,000 in origination fee, and $3,000 in servicing fee savings).
The savings to a borrower vary depending upon home value, but all options result in greater loan proceeds to the borrower.
Sunwest Mortgage Company is among a variety of lenders to announce reductions in fees for servicing, origination, mortgage insurance premium (MIP), and title insurance fees.
"The reduced fee options aren’t necessarily going to be available for long," said Sarah Hulbert, senior vice president and reverse-mortgage manager at Seattle Mortgage.
"It’s a great time for seniors contemplating a reverse mortgage to begin the process. It’s all a function of how the secondary markets value reverse mortgages. If they begin paying less for the fixed-rate HECM, we very well may see some of the fees return."
If you are senior in the market for a reverse mortgage, or an adult child doing the research for Mom or Dad, the good news is that fees have come down dramatically. The puzzling news (not to be confused with "bad") is that there could well be some costs in today’s advertised "no-cost reverse mortgages."
Make sure you understand the up-front costs and those incurred down the road.
Reverse mortgages have hit the mainstream. With that comes a variety of combinations and sliding scales.