Perhaps the biggest boost to the reverse mortgage industry occurred when the U.S. Department of Housing and Urban Development announced it would insure its own product, the Home Equity Conversion Mortgage (HECM).
Reverse mortgages allow senior homeowners, with a minimum age of 62, to receive proceeds from a lender. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
HECMs quickly raced to the front of the pack and soon accounted for nearly 85 percent of the reverse market. Detractors soon surfaced because the HECMs were tied to an adjustable rate. Why offer seniors an ARM, they said, when many older homeowners prefer reliable, dependable mortgage interest rates? (Would it make that big a difference when reverse mortgage customers are making no payments?)
Five years ago, the industry rolled out a fixed-rate HECM. Now, it seems even that product has come under fire.
According to the Consumer Financial Protection Bureau (CFPB), half of the borrowers are under 70 and that increasingly many of them are using the loan proceeds to pay off traditional mortgages (via a fixed-rate HECM). The CFPB believes that if younger borrowers use most, if not all, of the loan proceeds to refinance out of a traditional mortgage, they may not have the financial means to deal with health-related issues later on in life.
Curiously, not one reverse mortgage borrower was interviewed in the CFPB study. Much of the information obtained for the study came from previously published materials and interviews with lenders, counselors and consumer advocates. One of the CFPB’s objectives was to identify and assess consumer protection concerns.
Fixed-rate HECMs render the most lump-sum funds available of a reverse mortgage product. All of the cash is taken out when the reverse mortgage closes. However, adjustable-rate reverse mortgages can be set up with a monthly draw, cash, a line of credit or a combination of all three. The balance of the line of credit increases over time, giving the senior more usable funds.
Given the economy, growing consumer demand has been for as much cash as soon as possible. Hence, some reverse mortgage companies have focused solely on the fixed-rated HECM — the reverse mortgage option offering the most cash at one time. In addition, more cash offers more commissions to loan officers.
"By offering only the fixed, how could the senior make an informed decision?" said Marty Taylor, president of Stay In-Home, a reverse mortgage lender. "No one product fits all the various needs of seniors. To serve the wide and varying needs of seniors, it’s prudent to offer all the various HECM products and be able to clearly explain them."
Providential Home Income Plan Inc., a venture capital-funded company whose sole purpose was to originate and service reverse mortgage loans, offered a fixed-rate reverse mortgage in the early 1990s. While the company was one of the first to begin offering a program to enable seniors to tap the equity in their homes, some of the loans contained the controversial "equity share" component, giving the lender a significant portion of the appreciation in the home.
Often, that portion was 50 percent of a rapidly appreciating home, leaving some homeowners in debt when the senior died or moved out of the home. The "equity share" component no longer is included in reverse mortgages and is a key reason for the popularity of today’s products.
Sarah Hulbert, national sales manager for 1st Reverse Mortgage USA, remembers the problems some of the early reverse mortgages caused and says today’s lenders are going out of their way to offer clarity and variety.
"I believe the practice of offering only the fixed-rate HECM to consumers is definitely the rare exception, rather than the rule, in our industry," Hulbert said. "Virtually all reverse mortgage lenders offer both the adjustable- and fixed-rate HECM products and are committed to helping the senior obtain the product that is right for them.
"There are specific instances where an adjustable-rate reverse HECM, which offers a line of credit option, is the best option for the consumer. Likewise, the fixed-rate HECM often offers greater loan proceeds, which is valuable when the consumer needs to maximize cash proceeds in order to pay off existing mortgages and other debt. As such, both options need to be available and presented to HECM borrowers."
Maybe if the "researchers" who crafted the Consumer Financial Protection Bureau survey took the time to speak with reverse mortgage borrowers, they would find out what programs work and why.