Remember when seniors who took out a reverse mortgage were advised to stay in their home as long as they could in order for the loan to make sense?
The buzz among reverse mortgage professionals at the recent National Reverse Mortgage Lenders Association annual convention was that the new HECM Saver could soon be dubbed the HECM "Savior."
That’s because the new wrinkle not only saved the industry with its reduced risk but it also could prove to be a less expensive option than a typical home equity line of credit for anyone over 62 needing money for a short period of time.
The big difference between a line of credit and a reverse mortgage is that seniors don’t have to qualify for, or make a payment, with a reverse mortgage.
The U.S. Department of Housing and Urban Development and its Federal Housing Administration insures the nation’s most popular reverse mortgage, known as the Home Equity Conversion Mortgage (HECM). The new HECM Saver, which carries lower upfront fees because of a reduced mortgage insurance premium (MIP) at closing, became available Oct. 4.
The HECM Saver requires an upfront MIP of 0.01 percent of the maximum claim amount (the value of the home or $625,500, whichever is less). The HECM Standard upfront MIP remains at 2 percent of the maximum claim amount. Both products will have an annual MIP of 1.25 percent. This is an increase in the now HECM Standard MIP, which had been 0.5 percent annually.
The bottom line was that the FHA had to sharpen its pencil to produce what it thought would be a sustainable reverse mortgage program, given the need to raise mortgage insurance.
The Office of Management and Budget concluded that since many homes had dropped in value, the industry needed to charge more to cover the risk of people outliving the value of their homes. Mortgage insurance premiums were raised on most federally insured programs, including "forward" mortgages.
The result was to retain one program (HECM Standard) where owners could take out more funds with a higher upfront fee, plus introduce a cheaper program where homeowners would pay less upfront yet have lower maximum borrowing limits.
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 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are tax-free.
FHA Commissioner David H. Stevens told conference attendees that while he was bullish on both the HECM Saver and HECM Standard, he indicated that the HECM Saver was critical to the overall success of federally insured reverse mortgages.
Sarah Hulbert, senior vice president for reverse mortgages at Seattle Mortgage, said the most important development at the conference was the expansion of a sort of "second mortgage market" for reverse mortgages. Ginnie Mae (GNMA) acts like Fannie Mae and Freddie Mac for federally insured loans.
GNMA does not buy or sell loans or issue mortgage-backed securities (MBS). The agency guarantees investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans. It recently lifted its moratorium on approvals of new MBS issuers, resulting in more competition in the reverse marketplace. More competition usually means lower costs to consumers.
"We are promoting a program that can clearly help seniors who need liquidity," Stevens said. "But we are dealing with the most fragile universe of buyers in the marketplace … and we need to protect them."
"Protecting them" has become the major issue among reverse mortgage lenders. Many loan representatives say the mountain of regulations they now need to climb severely curtails them from serving their customers. Too many eligible seniors with home equity to tap have fallen through the cracks.
While some reverse specialists are staying in the industry to serve the huge number of baby boomers who will soon be eligible to qualify for the loans, it will be interesting to see how much equity remains in boomer homes.
That cohort borrowed much more than their pay-it-off parents whose primary goal was to own the roof over their heads. Those boomer funds — for cars, boats, vacations and tuitions — came via a home equity loan and then were often refinanced.
The HECM Saver and HECM Standard appear to be a viable solution for the near future. However, more realistic guidelines, coupled with a combination of the two current HECM programs — perhaps a new hybrid — will be required to service the equity-short boomers. They’ve changed every product they’ve touched: jeans, automobiles, ice cream, homes. Reverse mortgages will be no different.