Affluent Using Reverse Mortgages to Take Advantage of Distressed Property Values

While we continue to hear about reverse mortgages as a last resort, more are turning to it as a tool for the affluent marketplace as a vehicle for advanced planning.  Paul Savery, a reverse mortgage consultant with Wells Fargo told the Norwich Bulletin that some people are using a reverse mortgage to buy or improve a second home.

With housing prices at record lows, some wealthy homeowners are going bargain hunting with their reverse mortgage credit line as a way to close quickly on homes that are being sold at distressed prices.


The article also describes other strategies of how you can use a reverse mortgage as an estate-planning tool which is something that will eventually be more common, but so much attention being brought on people using reverse mortgages to purchase shady investment products, I was surprised to see the article.

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House Proud: Elders refuse to buy reverse mortgage

NEW DELHI: Reverse mortgage, a popular model allowing senior citizens to take money out of their homes, is failing to find an abode in India.

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Senior bank officials that SundayET spoke with have confirmed that the product has failed to find takers during the last two and half years of its existence in India.

Till now, less than 500 applicants have availed this loan in India since its inception in 2007, a senior bank official, who did not wish to be identified, said.

The reasons for the model not taking off in India are manifold. From an emotional attachment with one’s house to real estate price correction; from an absence of clear guidance against legal complications to inadequate marketing, the plan has been unable to meet the expectations of financial institutions.

Reverse mortgage is a plan through which senior citizens can avail loans from either banks or other financial institutions by mortgaging one’s home.

If a senior owns a house and has a mortgage on the house, he might get a reverse mortgage to pay off the existing loan and then have some money left over to take care of his expenses for the rest of his life. The homeowner could get that as a lump sum or a line of credit, and wouldn’t have to pay it back until he moved or died and the house was sold.

The banks can sell off the property to realise the loan amount. However, there is a provision that the legal heirs can acquire the property back by paying off the loan to the bank.

Dewan Housing, which is one of the largest housing finance companies, has been able to sell only 4-5 reverse mortgage loans during the last two years. Two large financial institutions, HDFC, which incidentally is one of the largest home loan lenders in the country, and Kotak Mahindra do not have reverse mortgage in their portfolios.

In fact, several other players in the segment are also facing difficulties in selling reverse mortgage products. Says Sujan Sinha, senior V-P and head of retail liabilities, Axis Bank, “The product has not done well. In India, you can count the number of cases of reverse mortgage on your finger tips.”

There are some very basic reasons that have worked against this product which has taken off rather well in international markets. The psyche of Indians does not make them comfortable with the idea of selling their home.

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Reverse Mortgage Calculator

August 17, 2009 - (RealEstateRama) — It is a good idea to understand what a reasonable amount of income to expect is from your reverse mortgage, based on your age, equity in your home and other financial variables in your life. You can use an online calculator to estimate what your reverse mortgage will look like.
The online calculator helps you to derive information about the amount you will receive from a lender for your reverse mortgage. It is only an estimate based on current interest rates and your particular situation, including your age and that of your spouse, the value of your home, and the loans currently associated with your home. The interest rate may change by the time you set up your reverse mortgage, thus the calculation by the lender may vary. It is important that you enter all of the information into the online form as accurately as possible to determine if you  qualify for a reverse mortgage based on your age and the equity in your home. Stating your location helps the calculator determine which programs are available to you in your area and what fees will be rendered on your reverse mortgage. Plugging in the value of your home and the mortgage balance remaining into the calculator will help determine how much you will receive from your reverse mortgage after you’ve paid off your current mortgage with  the funds. It will also indicate whether you will even qualify for this program. If you haven’t yet paid off your mortgage, you will need to use some of your reverse mortgage income to do so. This means that you may not end up with as much money as it seems when you are estimating your reverse mortgage benefits. The details matter when it comes to calculating a reverse mortgage for your particular circumstances, so it is best to enter all of your information into the reverse mortgage calculator.
With all the varieties of reverse mortgages available, you can expect there to be even more variety in the amounts and terms of individual reverse mortgage cases. When your are determining which one is best for you, or whether you need one at all, you consider the reverse mortgage in terms of your own situation, your short and long-term goals, and your priorities, like lifestyle, family, location, medical and other needs. Do not take out unnecessary reverse mortgage loans, because overall they are a costly way to borrow money. Think about your reasons for requesting the loan, and whether the outcome will be worth the costs.
Reverse mortgages can be confusing programs, and it essential that you understand how they work, how they will affect your home and your life, and the limitations they have. Take the guidance of an unbiased and well-informed counselor to guide you through the steps of obtaining a reverse mortgage and keep in touch with your lender throughout the life of your loan to stay abreast of importance developments in the reverse mortgage market.


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HUD Lowers Principal Limit Factors for FHA Reverse Mortgage Program

The U.S. Department of Housing and Urban Development posted Mortgagee Letter 09-43, which announced a new set of principal limit factors for the Federal Housing Administration (FHA) HECM program. The changes will lower the principal limits for the HECM by 10%.

According to the ML, the new principal limit factors must be used for all HECMs which the FHA case number is assigned on or after October 1, 2009.

All loans for which the FHA case number has already been assigned as of September 30, 2009 may be processed as usual. The lender need not change any of the calculations of principal limit or re-disclose to borrowers any changes in the HECM proceeds that the borrower will receive.

The announcement comes after the National Reverse Mortgage Lenders Association worked directly alongside AARP and FHA about what the industry’s options were. FHA felt that since the appropriations process is unlikely to provide credit subsidy, program changes are the only viable route for keeping the program operating past September 30, said a statement from NRMLA.

Since an appropriations bill hasn’t been passed yet, NRMLA told RMD that an interim measure known as a “continuing resolution” is being brought up in Congress. This will continue the suspension of the authorization cap on the HECM program, allowing HUD to continue insuring HECMs, but provides no credit subsidy.

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Reverse Mortgages, Simplified

The Office of the Comptroller of the Currency (OCC) issued a consumer advisory warning consumers 62 years of age or older of the drawbacks and dangers associated with taking out a reverse mortgage — and outlining the benefits of these “complex loans.”

The bulletin comes at a time when getting back to “plain vanilla” financial products continues to be a huge topic of discussion, especially among lawmakers conducting hearings over financial regulatory reform. The House Financial Services Committee this week is hearing testimony regarding the Administration’s proposed reforms, including a consumer financial protection agency that may regulate the types of loans banks can sell to consumers. Committee chairman Barney Frank (D-Mass.) has opposed the “plain vanilla” requirement that lenders would be allowed to market and sell only simple loans.

The “plain vanilla” language was mirrored in comments by American Securitization Forum deputy executive director Tom Deutsch to Forbes, when he compared the mortgage-backed securities (MBS) of the future to vanilla ice cream as opposed to past ‘Baskin-Robbins flavors.’

If reverse mortgages — or home equity conversion mortgages (HECMs) under the Federal Housing Administration’s lending program — were a flavor of ice cream, they might be chocolate.

They certainly would be appealing to qualifying homeowners looking for additional income to supplement their retirement plans or meet health care costs. Reverse mortgages typically bear low interest rates and do not require monthly payments. In fact, they are not due until the borrower ceases using the home — either sells it, moves out or passes away.

But just like that single-scoop of fudge-ripple, double-churned dark chocolate ice cream is likely to go straight to your thighs, reverse mortgages pose some drawbacks. The OCC points out mortgage insurance premiums and other up-front costs tend to make reverse mortgages more expensive over the long-term, and payments received are added to the loan balance over time, which also increases due to interest charged.

Plus, borrowers that neglect to pay property taxes, insurance and reasonable home repairs may find their loans become payable prematurely. Reverse mortgages are typically repaid by surrendering the collateral — the home itself. That works best when the borrower has passed away or moved into a retirement or assisted living facility.

But a reverse mortgage that becomes due when the borrower is not yet ready is a huge risk. If the borrower (or the borrower’s family in the case of the borrower passing away) wishes to keep the home, the mortgage must be repaid in full, plus all accumulated interest and fees.

So when the sugar high of a reverse mortgage wears off and the reality of the expense crashes down, borrowers might wish for a more “plain vanilla” loan. The OCC suggests in its bulletin that consumers consider other options — like standard mortgages and home equity lines of credit — that might not pose as large a risk.

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Fixed Rate vs. Monthly Adjustable Reverse Mortgage

When looking to get a FHA reverse mortgage, you now have the option to choose between a fixed rate mortgage and an adjustable rate mortgage. Not long ago, you only had one option - an adjustable rate reverse mortgage. Just recently, however, HUD has now provided a way to have another choice for your Home Equity Conversion Mortgage (HECM), or reverse mortgage.

Here are some reasons why a fixed rate reverse mortgage may be the better choice for you.

You Know How Much Money You Have

With an adjustable rate reverse mortgage, you never really know just how much money you have left available to you. Since the interest rate will change on either a monthly or annual basis, you could end up with a lot less money overall than what you had anticipated.

A fixed rate reverse mortgage, however, gives you a lump sum of all money coming to you. You receive it all at closing. There are no unseen elements in the plan that can affect changes in the amount you have later. It is all yours from the very start.

There Are No Surprise Interest Rate Hikes

Our nation's economy has seen a lot of changes recently, and there may still be unforeseen problems yet to come. Problems in it will affect your interest rates - either for good or bad. If you recently suffered loss of money in some investment you had, you have already experienced what could happen. Hopefully, it will not happen again anytime soon.

On an adjustable rate reverse mortgage, interest rates are protected by HUD and limited to a 10% increase from the starting point. No matter how you look at it, though, many people could not afford that kind of a raise in their interest. While no payments are made during the lifetime of the owner of the reverse mortgage, it is charged to the account and it will be paid later.

A fixed rate reverse mortgage does not have any changes in the interest rate. It is set from the start, which is why they can give it all to you as soon as the ink is dry.

You Can Make Better Plans for Your Money

An adjustable rate reverse mortgage is often a good way to go. There is, however, the potential for a rapid and unexpected drain of your money through increased interest rates.

A fixed rate mortgage gives you all your money from the start. This enables you to know exactly how much money you have allowing you to make better plans with it. This can also make your relatives - your heirs - happier because they know that more of it will probably come their way if you do not use it all yourself. Of course, if you do live longer than anticipated, it also means that your money will possibly last longer than an adjustable rate reverse mortgage which may experience higher than expected interest rate changes.

You can start looking into whether or not a fixed rate HUD reverse mortgage is what you need by using an online reverse mortgage calculator. Counseling is required by law and will also have to be provided in order to help you make the right financial decisions.

A thirteen-year veteran of the mortgage industry, Robert Griffin specializes in reverse mortgages and has helped over 3000 Americans find financial security with a reverse mortgage. The owner of Griffin Financial Mortgage LLC, based in Fort Worth, Texas, his memberships include the National Association of Mortgage Brokers (NAMB), the Mortgage Bankers Association (MBA), the National Reverse Mortgage Lenders Association (NMRLA) and the Better Business Bureau (BBB). Robert Griffin is also co-author of “62 Senior Moments.” If you would like more information, please call (866) 683-3690 or complete our online Reverse Mortgage Information.

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GAO Report Says Reverse Mortgage Changes Have Mostly Positive Effect

The US Government Accountability Office released a new report which found that reverse mortgage policy changes from the Housing and Economic Recovery Act have had mostly positive effects on lenders and borrowers.  However, recent market changes and developments have increased HUD’s risk.

In order to examine how the HERA changes affected lenders and borrowers, the GAO surveyed a representative sample of HECM lenders, analyzed loan-level HECM data, and reviewed HUD estimates and analysis of HECM program costs.


Overall, the GAO found that current economic conditions have had a moderate upward influence on lenders’ plans but secondary market conditions have had a downward influence on about one-third of lenders’ plans to start or continue offering HECMs.

Some industry participants that the GAO interviewed stated that the changes were a good compromise that benefited borrowers by limiting the origination fee and increasing the loan limit. Additionally, officials at NRMLA and MBA said the changes benefited lenders by making the product more attractive to individuals with higher-value homes.

The report also addresses the Fannie Mae pricing changes and estimates that approximately 90 percent of lenders viewed secondary market pricing requirements and the transition to live pricing as important factors in recent margin rate increases on HECMs.

Fannie officials explained that as the price they pay lenders for HECMs falls, the margin rate the lenders charge the consumers generally increases.  Some lenders we surveyed noted that margin rate increases stemming from pricing changes could make HECMs less attractive to borrowers because they would not be able to obtain as much cash from their HECM.
Some lenders noted that live pricing complicates their relationship with borrowers because the interest rate can change between loan application and closing, which may result in the senior being able to receive less money from their HECM than originally quoted.

Ginnie Mae is discussed as an alternative to Fannie Mae but because of certain provisions, lenders are exposed to extra risk on the loans as compared to selling HECMs to Fannie Mae.

Ginnie Mae requires HMBS issuers to buy back the HECM when the loan balance reaches 98 percent of the loan’s maximum claim amount.15 Second, issuers are required to pay interest shortfalls to investors when the loan is terminated mid-month.

The GAO found that in recent years there has been a rapid increase in the number of lenders participating in the HECM program. However, the bulk of HECM business is concentrated among a relatively small percentage of lenders. In fiscal year 2008, roughly 80 percent of all HECMs were originated by fewer than 300 lenders, or about 10 percent of HECM lenders says the report.


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RBS Looking to Package Reverse Mortgage Products

Reverse mortgage lending in the United States isn’t the only country getting special attention from consumer groups. Martin Lynch, head of reverse mortgages, RBS Reverse Mortgages in Australia told Lending Central that consumer advocacy group CHOICE is still not a fan of reverse mortgage products.

CHOICE is the largest consumer organization in Australia, which aim is to tackle the issues that really matter to consumers, arming them with the information to make confident choices and lobbying for change when consumers are getting a raw deal says their website.

Lynch maintains that the view adopted by CHOICE is “old fashioned” and does not take into account the current checks and balances (such as the stipulation that all customers consult with a legal or financial representative) and the respective guarantees of lifetime tenancy and customers never owing the bank more than the value of their property.

“CHOICE still has the perception that there’s a lot of predatory lenders out here waiting to get their hands on little old ladies’ money. “That view was out of date ages ago,” he declares. Lynch developed and launched RBS Reverse Mortgages (formerly ABN AMRO) in 2005.

According to the article, the reverse mortgage market in Australia is vastly different to reverse mortgage markets in the UK and US. “The primary driver in Australia is the achievement of low interest rates. In the US and UK the competitive driver is maximizing the amount that can be lent,” says Lynch.

“Here consumers borrow very conservative amounts by comparison. Typically in Australia 60-year olds can borrow less than half of what they could if they lived in the US or UK, which means the compounding issue here is less severe.”

“We’re also noticing that the age people take the product out is very different. The average age of our customers is 74 (40% of which are couples, 40% single women and 20% single men); whereas in the UK the average age is 68. Here people are encouraged to explore other avenues before turning to a reverse mortgage.”

RBS Reverse Mortgages is currently looking at diversifying by bringing packaged products into the equation. A car leasing package as well as healthcare solutions are being considered. “These packages are an ideal adjunct to the monthly income feature because suppliers need to know that monthly payments will be forthcoming,” he says.

“Many reverse mortgagees don’t have an income and therefore they can’t get credit for these things. But with the Royal Bank of Scotland behind the reverse mortgage suppliers know that the income will keep coming.”

I think it’s a interesting idea but with so much attention being put on cross selling here in the US, I don’t think we are anywhere close to these types of packaged products.

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Your Finances: Retirees should consider reverse mortgage

For some retirees, their financial plan centers on selling their home, downsizing to an apartment or smaller home, and using the remaining proceeds to help fund their retirement. Sounds like a good plan, until you retire and the housing market slows. Unfortunately, for many retirees, this is a current reality. If you find yourself in this situation, then you may want to consider a reverse mortgage.

A reverse mortgage enables homeowners, age 62 and older, to convert the equity in their homes to cash, without selling the property. The homeowner retains title and all the responsibilities of home ownership, such as taxes, insurance and maintenance. The homeowner or their estate ultimately has to repay the amount borrowed, plus interest and fees. But that repayment is not required until the homeowner dies, sells the home or stops living there permanently (perhaps to live in a nursing home). At no point is the borrower or their estate responsible for more than the price for which the home is sold. However, if the borrowers' heirs decide to retain the home, the entire outstanding loan balance will be required to be repaid.

Flexible financial options

Reverse mortgages offer the flexibility of financial options. The borrower can receive money as a lump sum payment, fixed monthly payments, a line of credit, or any combination of these. Additionally, funds from a reverse mortgage aren't taxed, since they are loan proceeds, not income. Homeowners may change their financial choice as their needs change. Borrowers can never be forced to leave their homes, as long as the property taxes and insurance payments are maintained. The amount of reverse mortgage equity you qualify for depends on factors such as your age, current interest rates and the value of your home. Income and credit history are not considered during the underwriting process. This is a great advantage for seniors who have trouble qualifying for traditional loan products.

Another often overlooked benefit is there are never any monthly payments due and you can stay in the house you have come to call home. The emotional peace of mind of being able to remain in your house is truly priceless. Of course, there are trade-offs. Compared to a regular mortgage or home-equity loan, the closing costs are usually higher. Therefore, reverse mortgages are not for everyone and should not be entered into lightly.

As is the case with any product, you may encounter people seeking to take advantage of you. That is why it is important to work with a reputable lender. One way to protect yourself is by working with a company that is a member of the National Reverse Mortgage Lenders Association. Members of NRMLA subscribe to a code of ethics focused on protecting the homeowner.

If you are interested in exploring a reverse mortgage, ask your lender to educate you on your options. Do not sign anything unless the process is clear to you. If you are unsure, invite a friend or family member to be part of the process. The goal here is peace of mind.

Laura Medigovich is a financial planner and assistant vice president for M&T Bank's Hudson Valley region. Her column appears Sundays.

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Mortgages what Can I afford? Would debt consolidation help?

The better your credit, the easier it is for you to qualify for a loan. Can I afford a home? How much money can I qualify for? As a general rule , your buying power is calculated by multiplying your annual gross income by two and a half (2 ½).


What Can I Afford?

The better your credit, the easier it is for you to qualify for a loan. Can I afford a home? How much money can I qualify for? As a general rule , your buying power is calculated by multiplying your annual gross income by two and a half (2 ½). For example, if you have a household income of $45,000, you might be able to qualify for a $112,500 home. You could actually qualify for more or less, depending on your individual debt, credit history and amount that you have for a down payment.

Debt-to-Income Ratio

Your buying ability will be affected by factors such as your income, down payment, debt, and credit history. Your debt payments, such as credit card bills, car loans, and other expenses such as housing expenses, alimony and child support, should not exceed 36% of your gross income.

To calculate your debt-to-income ratio, divide your total monthly debt expenses by your total monthly income.

Mortgage Types/Lenders

Mortgage types, rates and lenders are usually published daily in the business section of your daily newspaper. Today's homebuyer has more financing options than ever before.

From traditional mortgages to adjustable-rate and hybrid loans, there are financing packages designed to meet the needs of virtually everyone.

While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Ask your lenders for a "good faith estimate" so you can compare all of your costs and make the decision that will fit into your budget.

Need to consolidate your debt read more here http://www.anewhorizon.org

Fixed Rate Mortgages

If you plan to own your home for five or more years, a fixed rate mortgage can protect you from inflation. Since your principal and interest payments are fixed, your monthly payment stays the same.

Long-term loans (20-30 years) make it easier for a person to qualify for a loan by giving you a lower monthly payment but at a higher interest rate. This means you are paying more interest for the full term of the loan.

Short-term loans (10-15 years) give you higher monthly payments but the interest rate is lower, which helps you build equity in your home much faster because less of the payment goes to interest.

Adjustable Rate Mortgages (ARM)

ARMs are popular because their interest rates are lower than a fixed rate mortgage, giving you a lower monthly payment. This helps the consumer qualify for a larger mortgage, but the interest rate and monthly rate may change within a given time and to a predetermined amount.

Understand the consequences to your budget by looking at each scenario. Make sure that you can afford your new monthly amount if the rate goes up.

Bi-Weekly Mortgages Recently banks have come up with creative ideas to help the consumer pay their mortgage on a bi-monthly basis instead of the traditional once a month method. Through this method of payment, you can pay off your home in less time with less money. By simply paying half of your monthly payment every 2 weeks, you will subtract 7-9 years off an average 30-year loan. You will earn equity in your home faster because more of your payment is being applied to the principal of the loan instead of the interest. At the same time, if you have Private Mortgage Insurance (PMI), those premiums will also be eliminated in a shorter period of time, which will result in a greater savings over the life of the loan. Your lender, interest rate, escrow payments, etc. all remain the same.

Balloon Mortgages

Balloon mortgages are short-term loans that have some of the features of a fixed mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. At the end of the loan term, there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full or refinanced.

Reverse Mortgages

A reverse mortgage is a complex home loan designed for senior homeowners who have built up substantial equity in their property.

In a reverse mortgage, the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application. The lender pays you the money either in a lump sum, in monthly installments, or as a line of credit. Unlike a traditional home equity loan or second mortgage, repayment is not required until you sell your home, move out permanently, or die. The amount of money you owe increases over time because you do not make payments. If you sell your home, you can keep any proceeds from the sale of your home in excess of what you owe the lender. To qualify for a reverse mortgage you must be at least 62 years old and the mortgage on your home must be completely or nearly paid off. You can get a reverse mortgage regardless of your current income.

F.H.A. Home Loans

The "203B" F.H.A home loan requires 3% from the borrower and permits 100% of the money needed for closing costs to be a gift from a relative, non-profit organization or a government agency. F.H.A. home loans do not have strict borrowing criteria. Someone may have had a few credit problems and still be able to qualify for this "203B" loan. For more information on F.H.A. loans go to the website www.hud.gov/offices/hsg and review the different information capsules they have available to the public.

View more info -- http://www.anewhorizon.org

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What should you know before your think about a reverse mortgages

The number of reverse mortgages backed by the government jumped nearly 20 percent in March and April alone from the same period in 2008. At a time when seniors have seen their retirement assets depleted by market losses, tapping home equity has been a safety net.  But it can be a risky one.

If your parents are at least 62 years of age and have significant equity in their home, a reverse mortgage can turn that equity into tax-free cash without forcing them to move or make a monthly payment.

If it’s right for them, it’s a worthwhile financial tool. If not, they could make some serious mistakes with their financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

• A lump sum cash payment;

• A monthly cash payment;

• A line of credit (which tends to be the most popular option);

• Some combination of the above.

When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs.  Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for.

There are three basic types of reverse mortgages:

• Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;

• Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);

• Proprietary reverse mortgages are private loans that are backed by the companies that develop them.

The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county.

Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services, home improvements or to pay off their current mortgage or credit card greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes and evaluate with the help of a financial adviser if reverse mortgage funds can be used to restructure estate taxes.

Elderly borrowers will have to consult with a HUD Counselor or financial advisor before they’re granted this loan – that’s one of the requirements. They should consider a Certified Financial Planner ™ professional to do this because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300- $500.

Here are other things to consider:

Cost can be substantial: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can run between $12,000-$18,000. The loans are based on anticipated home value appreciation of 4 percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

They’ll need to make sure they’re not endangering their Federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if their total liquid assets exceed allowable limits under federal guidelines, they might endanger your benefits. This is another critical reason to work with a financial adviser on this decision.

Rates can be higher: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount they owe each month.  Again, check the total annual loan cost.

Their mortgage can be called: The homeowner or estate always retains title to the home, but if they fail to pay your property taxes, adequately maintain their home, pay their insurance premiums, or change their primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

The family needs to talk. If your parents’ house is their major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why that in addition to discussing a reverse mortgage with a financial adviser, parents and their adult children need to talk with their family.


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There's No Place Like Home

Retirees have many housing options available


People are enjoying longer and healthier lives. As a result, seniors are living independently for greater periods of time. The decision on where to live after retirement is one that every retiree will have to make. However, these days there are many options available to retirees.

Staying in the Family Home

For many retirees, staying in the family home is a priority. Carrie Schonlaw, aging program coordinator for the Five County Association of Governments, says this option often requires some modifications to ensure safety and comfort.

“People want to age in place and stay in their homes for as long as they can,” Schonlaw says. “There are a few very simple and inexpensive things that can be done to help people maintain as much independence as possible.”

Easy Home Adaptation:
✔ Widen doors to accommodate wheel chairs.
✔ Install ramps or do stair modification.
✔ Put grab bars in bathrooms and non-skid decals in shower.
✔ Buy a shower chair.
✔ Get a raised toilet.
✔ Install anti-scald devices.
✔ Brighten dark spaces.
✔ Remove slick surfaces or tripping hazards like throw rugs.
✔ Put sturdy rails throughout the home.
✔ Take advantage of fire prevention technology.

Reverse Mortgage

Surviving in today’s economy can be a challenge for seniors living on a fixed income. For some, a reverse mortgage is a simple way to remain in the family home. A reverse mortgage allows borrowers 62 years and older to spend the equity in their home, but still retain ownership.

Alan Crooks, certified mortgage specialist, says the lender collects the interest on the home when it is sold or the person dies. “You can never owe more than the home is worth,” Crooks says. “The estate will gain on the appreciation and lose on the mortgage.”

With a reverse mortgage, homeowners have the choice of taking a single lump sum of cash, getting a monthly loan advance, establishing a line of credit or using a combination of these options. The amount that can be lent depends on the age of the homeowner, the current interest rate and the appraised value of a home or the Federal Housing Administration’s mortgage limits for a specific area.

Before receiving a reverse mortgage, borrowers are required to take an informational class. Crooks says the advantage of a reverse mortgage is that the homeowner never has to make a payment as long as they continue to live there. The loan is due when the owner dies, sells or moves away from the home. If there is equity left over when the property is sold, the homeowner or estate gets that money back.

Downsizing

As people age, routine house and yard maintenance becomes more challenging. For some, moving into a smaller home is the perfect solution. John Houston, Realtor for ERA Brokers Consolidated, says there are endless housing choices for seniors who wish to live in Washington County.

“The availability of properties is wonderful,” Houston says. “With interest rates being as low as they are and inventory being as high as it is, there are great opportunities to buy and downsize.”

However, Houston says downsizing is only a good option if seniors get into a home that is right for their needs and budgets. Houston advised considering the following issues before making a purchase:

✔ Association Dues — Fees go up as the cost of insurance and grounds keeping increase. People with a limited budged should remember the price they pay when they move in won’t stay the same forever.

✔ Stairs — These can present a problem for seniors as they age. Fortunately, there are numerous single level units available in Washington County.

✔ Amenities — Each area features different options. Check to see if a property offers what a person desires such as a pool, exercise room or club house. For those who don’t want these amenities, consider areas where they are not offered and therefore not included in the purchase price.

✔ Association Rules — Some associations don’t allow owners to rent their property after they move out. Other places have rules against upgrades or landscape changes. Storage of recreational vehicles, off-highway vehicles and boats are sometimes prohibited.

✔ Pets — Not all places allow pets or have spaces for them to play.

✔ Demographics — Some neighborhoods are geared towards a younger population and have children playing outside or higher noise levels.

✔ Proximity — Check to see if the property is close to shopping facilities, medical care, churches and other places the homeowner may frequent.

✔ Social Connections — Many retirement communities offer group activities and places for residents to gather.

✔ Income — Find out how the purchase of a home will affect trusts, wills and estates.

Sensational Senior Living

St. George is a Mecca for senior citizens, sporting an endless array of unique housing opportunities. For many, retirement signals a chance to ramp up activity rather than a time to slow down. Places like SunRiver St. George were developed with this personality type in mind.

Billed as “an active adult golf course facility for people 55 and better,” SunRiver was designed for seniors on the go. However, SunRiver is about more than beautiful homes in a golf course setting. SunRiver marketing director Micheal Green says the emphasis is on a community center where residents can enjoy a wide range of sports, educational classes, art and leisure activities.

“The community center really is the hub of activity,” Green says. “We have an environment that fosters social contacts, physical activity and educational opportunities.” Seniors who no longer feel comfortable driving their cars have no problem getting around SunRiver — golf carts are welcome throughout the development.

Assisted Living

Aging baby boomers are looking for more than a traditional nursing home. Each person has different needs, so the “one size fits all” form of assisted living has gone by the wayside. Today, seniors can choose their level of care based on individual needs. Some developments such as Beehive Homes offer housing for all stages of life.

On the most basic level, the Beehive Cottages has individual condos based around a community center where residents can go for meals, exercise and leisure activities. Administrator Mary Sanders says the cottages are designed for people who don’t need supervised care but are attracted to the amenities and community lifestyle.
“Studies of aging baby boomers have found the more active they remain — physically and mentally — the better their quality of life,” Sanders says.

Beehive Homes has two levels of more intensive care based in group home settings. Level One offers help with things such as showering, laundry and supervision of medication. Level Two is more intensive and features a certified nursing assistant on staff at all times. Beehive also has an Alzheimer’s Unit within its system.

Brenda Harrison, house manager at Beehive Homes, says the modern day group home is tailored to the individual. All meals are home cooked and served in a casual setting. Residents who are able to care for a pet are welcome to have them. Activities and special events are part of the package.

“We try to put ourselves in our residents’ position,” Harrison says. “We treat our residents with the utmost respect and dignity.” sgm

Source

NRMLA Questions Validity of Consumer Reports Reverse Mortgage Investigation

When researching a product, be it a flat-screen television or a car, many of us often turn to Consumer Reports for an evaluation of what is available. But after reading their reporting on reverse mortgages in the September 2009 issue (“Reversals of fortune: The next financial fiasco? Can it be reverse mortgages”), one has to question whether there is any validity to anything that ever appears in the magazine.

The piece (which appears without a byline) was reported and we can assume written by Andrea Rock, who recently appeared on a local Los Angeles television newscast further knocking the product. The combination of Ms. Rock’s unbalanced reporting, the frightening headline and the photo of a sad widower holding his recently deceased wife’s photo, combine to scare seniors who are potential borrowers away from reverse mortgages. The piece is largely comprised of inaccuracies, a perfunctory level of research that misinterprets many of the facts and does not touch on recent improvements in the product, and three real life stories used as examples that are a few years old and probably could not reoccur given recent regulations adopted both in the states and federally. People tend to turn to Consumer Reports to help investigate a product that they are interested in purchasing, but the information in this article is comparable to reporting on televisions and ignoring that flat screens exist.

There are now over 400,000 reverse mortgage loans outstanding in the United States. Reports from both AARP and our large banker members indicate that upwards of 93% of the borrowers feel the product has improved their lives. They have primarily utilized these loans to pay off mortgages and reduce their monthly expenses, to avoid foreclosure, to afford in-home health care. But where is even one of these hundreds of thousands of success stories in Consumer Reports?

Instead or running the photo of the desolate Ernest Minor holding his deceased wife’s photo and facing foreclosure, for example, the magazine could well have run a photo of James Clark from the state of Washington whose wife passed away recently and could not stay in his home and meet his monthly expenses without her pension and social security. Mr. Clark took out a reverse mortgage, paid off his forward mortgage, and now not only can afford to remain in his home, but also has a line of credit that provides him with some financial breathing room for the first time.

The article reports (and inaccurately) that “Reverse mortgages started out as a niche product to give cash-strapped seniors supplemental income.” Actually the product was conceived by senior advocates and FHA to allow seniors to utilize the equity in their homes to stay in their homes. Among the product’s intentions (and now its achievements) was keeping health care costs to taxpayers down by reducing hospital and nursing home stays. (HUD is currently proposing a study aimed at quantifying the positive effect of reverse mortgages on individuals and also on our society.)

Consumer Reports’ five and a half page article is so full of misinformation and bias that it calls for a detailed refutation. So let us go through some of the story’s specifics:

Causes for concern

The article opens by acknowledging reverse mortgages “can be valuable” but as “a last resort” for seniors who want to stay in their homes. But, it reads, “those loans can be terrible for customers who don’t understand the complicated rules governing them and how quickly high fees and interest charges can balloon.”

Frankly, the only thing “terrible” about reverse mortgages is the doling out of misleading information to seniors, be it from a grandstanding politicians or poor magazine reporting.

The fees and interest charges, which are misunderstood and miscalculated in Consumer Reports, are comparable to any mortgage product. In fact, the fees and costs associated with an FHA Home Equity Conversion Mortgage (HECM) are similar to those incurred with a traditional FHA forward mortgage. And the largest part of the fees is to pay for FHA insurance, a valuable concept actually that protects borrowers if their lender’s operations are disrupted for any reason or if their home value decreases over the life of the loan and that provides seniors with more money than any non-insured product would.

There is no mention in the article that reverse mortgages may be the only product in the country that requires counseling before you purchase it, that both counselors and lenders must be approved by HUD, that a new counseling protocol is about to be issued that will require continuing education and testing every three years, or that a lender is required to provide a Total Annual Loan Cost (TALC) disclosure that projects all the possible costs over varying durations for the loan. One would think that anyone who reports to consumers on the product has a responsibility to provide that information. Consumer Reports chose not to.

As far as not understanding the complicated rules, the Consumer Reports piece throughout demonstrates a complete lack of respect for the intelligence of America’s seniors. The counselors and lenders in this field consistently demonstrate profound concern for their clients, provide reams of information and are always available to answer questions. This is a service business.

The hyperbole continues:

The article reports that “the use of loans is exploding,” which might be good news for the industry– were it true. But a growth of 5% in 2008 and another 5% in 2010 is not an explosion by anyone’s imagination.

It reports that lenders take no risks and push the loans on seniors for spending on “vacations, new cars and more.” Given the amount of regulation (HUD, FHA and half a dozen regulatory agencies) and NRMLA’s Ethics review process, anyone who sells the product inappropriately is taking perhaps the hugest risk of all—ruining their professional reputation. And all indications are that since the financial crisis hit, the vast majority of borrowers are using their loans to pay mortgages, keep up on their monthly bills, or, as NRMLA President Peter Bell says, use the funds to cover bills as they wait for their portfolios to regain some of what has been lost.

The article then says that “Lawmakers and regulators are getting worried.” Well, we count five in the whole country who have expressed concern—Senator Claire McCaskill, California assemblyman Mike Feuer, Minnesota Attorney General Lori Swanson, HUD Inspector General Kenneth Donohue and Comptroller of the Currency John Dugan, whom, despite some specific criticisms, has said he is a fan of the product. While the others have spewed scary rhetoric, none can provide details that back up their claims of widespread senior abuse when challenged by us or by the press. Without facts, this rhetorical barrage has been irresponsible—and reporting it as fact is even more irresponsible. With the exception of Dugan’s OCC STAFF, none of these people have become involved in the ongoing reexamination and retooling of the product being lead by FHA and supported by six other banking and other regulatory agencies in collaboration with associations such as AARP and NRMLA.

As a result of these rather lurid but under researched assumptions, Consumer Reports then states its investigation has found “more cause for concern.” The article argues:

–“Loan bailouts have soared.” It reports that the FHA federal insurance fund has taken over $381.3 million in loans based on a study of more than 500,000 loans over two decades. But it ignores the fact that the FHA insuring these 500,000 loans has taken in over $7 billion of income from the HECM program in that time as recently reported by the Congressional Budget Office.

The ability to assign loans to FHA when the loan balance grows to 98% of the maximum claim amount is a feature that was designed into the HECM program to entice lenders to participate. It assures a lender that there is a definite point at which it can exit the transaction – without impacting the senior homeowner. Assignment of loans is ordinary and expected. It does not mean that the FHA insurance fund is losing money on payouts for loan assignments. Interest continues to accrue and servicing fees continue to be assessed and added to the loan balance and will ultimately be collected by FHA when the loan is finally terminated. In many cases, there is a substantial amount of equity remaining in the property after a loan has been assigned.

The article also fails to report that among the three payment options for borrowers—lump sum, life tenure or term payments, or line of credit—only those who take lump sums typically end up with loan balances that might exceed the value of the property at disposition. As Jerry Wagner of Ibis Software, one of the leading industry analysts, recently reported, “No one has ever lost money on a tenure payment loan or line of credit.”

–“Taxpayers are being tapped to subsidize reverse mortgages for the first time” referring to the $798 million appropriation called for by the President’s Office of Management and Budget, which our research indicates is based on a further, extremely pessimistic projection of future decline in home values. In addition to the $7 billion in mortgage insurance revenue collected in previous years, thorough research of current events by Consumer Reports would have revealed that the predicted shortfall is now being questioned and still an unsettled issue in Congress.

–“Marketing can be misleading,” which we all agree with. In response, the HUD Inspector General, GAO and FTC are keeping an eye on industry advertising. In addition, NRMLA has recently expelled or suspended members for advertising deemed in conflict with our Code of Ethics and Professional Responsibility and referred inappropriate actions by non-members to the appropriate authorities for further follow-up.

–“Unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to buy financial products such as deferred annuities.” There was an earlier period in the product’s history of cross-selling of reverse mortgages by insurance salesmen who had an ulterior motive of using loan proceeds to fund the purchase of other products. But that issue was addressed by a provision in the Housing and Economic Recovery Act of 2008, implemented by HUD in October, 2008 that requires any individual involved in a HECM reverse mortgage transaction to be an employee of an FHA-approved lender or correspondent. Yet again, Consumer Reports makes am alarming statement without researching and calling attention to the good work and new regulations in this area under discussion or on the table at HUD and within many state legislatures.

All of this indicates the reporting in this piece seems to be lacking in the kind of rigorous research one would expect of a well-reputed national publication, even more surprising since all the players in this sector are accessible and all the new information is readily available. Instead, the Consumer Reports article lazily relies on the easiest and most clichéd criticisms of a complex situation.

Outdated Stories

The Consumer Reports article provides three slanted stories as examples written to horrify interested borrowers, or anyone else who does not examine the facts provided. Let’s look at them one at a time:

The first story is of Ernest and Norma Minor who took a reverse mortgage on their Marysville, California home in 2005 to cover the health care expenses of her multiple medical problems. At the time, the loan was the only option for the Minors to remain in their home and cover their medical bills, a fact that is not reported in the Consumer Reports story. The lender was Financial Freedom and the Minors went through counseling with a HUD-approved counselor and signed a document to confirm this.

Norma Minor was 68 at the time, but Ernest was not yet 62, below the age required for a HECM. He chose to remove his name from the deed. The Minors solved their immediate problems, using $70,000 to pay off their existing mortgage and lower monthly expenses and $91,700 to pay her medical bills, fix their roof, and for other expenses.

In July of 2007, Norma died. Since she was the exclusive borrower, Financial Freedom called her loan to be due and payable, as is required under HUD rules. But the housing market took a dive and value of the house had shrunk to $130,000. The only way for Minor to satisfy the loan was to put the house up for sale.

Consumer Reports writes, “Minor was surprised to receive a letter from Financial Freedom saying that (his wife’s) death made the mortgage payable.” And also that, “he and his wife never understood that he risked losing the home.” But in addition to the counseling session in which this was explained, Financial Freedom insists both borrowers sign a Non-Borrower Spouse Ownership Interest Certification which states clearly that in the event of the borrower’s death, the non-borrower would have to pay off the loan or sell the house. The Minor case was no different. One would assume that if Consumer’s Reports researched this, they would have been made aware of such signed certificates. But the magazine chose to ignore the existence of documents which would have altered their portrayal of the Minor story.

In addition, even elementary research should have revealed to Consumer Reports that revisions in counseling over the past two years would now assure anyone taking out a HECM today that they would be advised of the possibility of non-borrower occupants having to vacate the home upon the death of the person whose name is on the deed.

Despite the requirement by HUD regulations that under these circumstances the loan was required to be paid back within one year from Mrs. Minor’s passing, Financial Freedom held off foreclosing on the property for an additional two years to give Ernest the opportunity to find alternative resources.

The second story described by Consumer Reports is of Brett and Cathy Palmer who received a notice from the Wilmington Savings Fund Society Bank that as heirs they were responsible for the balance on a reverse mortgage Cathy’s mother had taken. The amount that had been drawn down had been $77,000 in 1993, but the balance requested in 2007 was $588,000.

How could that possibly be, you ask? A HECM purchased in 1993 at that amount would have a balance of about $200,000 today at the interest rates over the past 14 years. But Cathy’s mother did not take out an FHA-insured HECM. In fact, Cathy’s mother had purchased a proprietary reverse mortgage with a shared appreciation feature – a product that has not been available anywhere for nearly a decade now. With that type of product, the lender is eligible to receive a payment representing a percentage of the home’s increase in value over the life of the loan – in exchange for providing a larger benefit to the borrower than would have been available without the equity share. Cathy’s mother agreed to give the lender 100% of the house’s appreciation. Shared appreciation reverse mortgages were an early product introduced before the advent of the FHA HECM — and in a period of considerably higher interest rates than are available today — that gave the lender a participation in the growth in value of the home as an additional protection. In exchange for that equity share, the borrower received a larger benefit than would have been available without it. In any case, those types of products no longer exist, which is why it is an inappropriate example in a magazine story on reverse mortgages published in 2009. It’s the “flat screen case.”

The third story is about Miguel and Laura Posada who took out a $100,000 reverse mortgage on their Sacramento home in 2005 from U.S. Financial Mortgage. The loan officer at U.S. Financial allegedly pushed the Posadas to put the proceeds into an annuity that he claimed would help qualify them for extended care health coverage under Medical. This is another outdated example from 2005. But it is now 2009 and U.S. Financial Mortgage no longer exists. The secondary market, which buys the loans and securitizes them, caught onto their scheme and stopped doing business with them, which pushed them out of business. And an insurance brokerage set up to pull such schemes would be precluded by HUD from being involved in the sale of reverse mortgages today.

While Consumer Reports was digging out these outdated, no longer applicable stories, we have been focusing on current stories: Like the one about the lender in Central Florida who kept 30 families out of foreclosure in the month of March alone. Or the 83 year old woman outside Miami who needed a hip replacement, was turned down five times by her insurance company that was waiting for her to die, took out a reverse mortgage, paid for the surgery, then used the balance to hire a lawyer and sued the insurance company, which then paid her back for the surgery. Or the gentleman outside of Denver who was suffering from diabetes, lost a leg and needed transportation to his dialysis, who could not keep up on his real estate taxes and whose bathroom had failed and was using his sink for everything. He took out a reverse mortgage, paid up his taxes, fixed his bathroom and now can afford transportation to his weekly dialysis treatments.

Errant Calculation

Consumer Reports calculates that a 74 year old borrower who takes out a HECM on a $300,000 house with a monthly adjustable interest rate in the New York City area would receive $182,541. It goes on to report that the loan would cost $15,000 in closing fees plus another $15,000 over the life of the loan in insurance premiums and monthly servicing fees. It then calculates the cost is one sixth of the amount borrowed.

This is not accurate. Since the costs are actually a part of the loan, the amount borrowed in this scenario would actually be $197,541 ($182,541 plus $15,000), so the percentage of the costs is lower than reported. In addition, the article fails to mention that if the loan is taken as a line of credit, the untapped balance continues to grow, which lowers the percentage of the costs even further.

Furthermore, a significant component of the $15,000 in closing costs was the 2% upfront mortgage insurance premium ($6,000) paid to the federal government, to FHA, on this loan. In return for paying that mortgage insurance premium, the 74 year old borrower received over 60% of the value of the home in initial reverse mortgage proceeds. A loan without such mortgage insurance might have saved the $6,000 in upfront mortgage insurance premium, but would also have provided a benefit that would have been less than 45% of the value of the property, a difference of over $50,000.

NRMLA would have been and still is happy to share the model that demonstrates this with Consumer Reports.

In addition, the article fails to report that closing costs vary from state to state and in many locations they are less expensive than in New York.

The Future

The Conclusion of the Consumer Reports article looks to the future and expresses concern that proprietary reverse mortgages, which are not currently available and which are not insured by FHA, will make a comeback. Because proprietary products do not involve the government, they are free of some of the regulations. But the NRMLA Code of Ethics and Professional Responsibility sets the same standards for proprietary products as for HECMs, including counseling and restrictions on cross selling. And over 95% of the proprietary mortgages offered before the funding disappeared were offered by NRMLA members.

Consumer Reports says that its publisher, the Consumers Union, believes that sellers of reverse mortgages should be required to make sure the loan is suitable to the borrower. FHA, working hand in hand with the industry, AARP and other interested parties, recently designed and is currently implementing a new counseling protocol to help prospective borrowers determine if a reverse mortgage is suitable for their own individual circumstances. Because every case is completely different, it is the senior homeowner, with assistance from an independent, objective HUD-approved counselor, who can best decide if a reverse mortgage fits his or her needs. Additionally, HUD is implementing a financial assessment, to be done by both counselors and lenders, to help prospective borrowers determine whether they will be able to sustain themselves in the home and pay taxes, insurance and home maintenance costs, if they follow through with the reverse mortgage.

This is not reported. The Consumers Union asks for proprietary loans to require one-on-one counseling, which all of our members already do.

At its core, as NRMLA has said before, the reverse mortgage is a compassionate financial product. Those who conceived it found the means to provide hundreds of thousands of American seniors with comfort at a difficult time in their lives. That is not to say that the product is yet perfect or that there are not swindlers out there trying to take advantage of seniors with cash. But there are many people in and out of the government working together on a daily basis to improve the product and police the industry. And, we are making great strides.

It is not too much of a stretch to expect a publication like Consumer Reports that wants to be depended upon, to vigorously explore and report on the entire present situation rather than to publish an incomplete view of the industry full of unsubstantiated fear-mongering. They should know better.

Source

Reverse mortgage strategies come of age

Reverse mortgage products in Australia have traditionally been met with scepticism and even outright criticism from the media and prominent financial industry figureheads.

Just recently, the Australian Securities and Investments Commission (ASIC) in its Reverse Mortgage Guide raised concerns that reverse mortgages could potentially see seniors borrow more than needed.

However, the reality is that most seniors are actually using reverse mortgage products sensibly and with measured caution.

We recently conducted the largest study of reverse mortgage users in Australia to identify how these products are being used by seniors.

The results, which were derived from over 425 interviews with reverse mortgage customers, revealed the majority of seniors are well informed about how to use a reverse mortgage and are only using small amounts of the funds available to them.

Predominantly, reverse mortgage funds are being used by Australian seniors to make living on the pension less of a struggle.

According to the study, the most frequent use of reverse mortgages was for home renovations and improvements – creating the double advantage of making the home more pleasant to live in, while increasing the value of the property.

The primary uses of reverse mortgage funds can be seen in the graph below.

Taking a closer look, our study also found that the types of home repairs customers undertook ranged from basic maintenance, such as a coat of paint, to making the property more suitable for retirees to stay in for longer.

In addition to physical comfort, these renovations and improvements can have a significant mental benefit for seniors.

Those reverse mortgage customers who opt to utilise the monthly income option find that amounts as small as $200 per month can transform their quality of life.

Similarly, having a line of credit in reserve removes the fear of unexpected bills. Many customers refer to a line of credit option as a ‘rainy-day facility’, with no interest charged or monthly fees if it is not used.

Another interesting use of funds has been helping family members.

Reverse mortgage customers have assisted their family by paying deposits on properties for children, assisting grandchildren with education or helping elderly relatives in aged care.

A new breed of borrower

Over the past few decades Australia’s baby boomers have been toiling away at work, with many setting aside a nest egg for their retirement.

For most, the bulk of that nest egg is tied up in their home – an asset that financial planners have typically excluded when developing financial planning strategies.

Only one-third of Australians actually have enough in savings to comfortably fund their retirement.

According to ASIC, a ‘comfortable’ retirement income of $38,000 per annum requires a senior to have at least $722,000 in savings at the age of 55. Many have suffered losses to those savings as a result of the global financial crisis and two consecutive years of negative super growth.

Traditionally, reverse mortgage products have appealed to asset-rich, cash-poor retirees.

However, in the current financial climate many seniors with mixed retirement portfolios (super and additional assets) are seeking a more sophisticated and longer-term approach to their financial planning.

We’ve noted that many borrowers are now in need of the support of a financial planner to assess how they can get the maximum benefit from their super returns by utilising other assets (such as the family home) via financial products like reverse mortgages.

The average loan life for a reverse mortgage is approximately 14 years. Throughout this time, borrowers will seek support to maximise the use of their super, assets and reverse mortgage loan to get the best results (eg, drawing on their reverse mortgage loan when rates are lower to give their super returns time to improve).

Borrowers are also seeking guidance about how they should receive their money from their reverse mortgage loan, as either a lump sum, monthly income or line of credit.

As more Australians transition into retirement, it seems the traditional approach of ignoring the family home as an asset in financial planning is coming to an end.

Reverse mortgages at a glance

* The average reverse mortgage size in Australia is $66,000 (Deloitte/SEQUAL).

* Australia’s reverse mortgage market is currently worth $2.5 billion (Deloitte/SEQUAL).

* The reverse mortgage industry is growing at a rate of 23 per cent per year.

* By 2020, 18 per cent of Australians will be aged over 65 (McCrindle Research, Australia in 2020: A Snapshot of the Future).

* Number of financial planners and brokers currently distributing reverse mortgage products: 2,500.

Source

Home advantage: Reverse mortgages

Reverse mortgages are little understood as a wealth accumulation strategy and source of credit.

The idea of taking out a reverse mortgage on your principal home was a strategy many Australians viewed with wariness and, until now, the majority of financial planners has largely ignored.

But with up to 60 per cent of Australians’ wealth locked up in the family home and with their investment assets crashing, that view is beginning to change.

In the past, reverse mortgages flew under the radar of many financial planning firms, with planners preferring more traditional avenues of wealth accumulation for pre-retirees.

Since 2005, the use of reverse mortgages as an investment strategy has been typically restricted to a small segment of retired workers who wanted a source of credit to fund an improved lifestyle in retirement, according to Kevin Conlon, the executive director of the Senior Australians Equity Release Association of Lenders (SEQUAL).

But with the financial crisis biting into clients’ investments, there is growing interest in the strategy from investors who need a source of credit to supplement their investment incomes.

“What we’re seeing emerge in the current [environment] is a broader base of consumers, even consumers that the market didn’t expect to see, and these are self-funded retirees,” Conlon said.

“Their exposure to a narrow risk space has become obvious to them and they are increasingly making enquiries as to how an equity release strategy may suit their changed circumstances.”

John Thomas, chairman of both Australian Seniors Finance (ASF) and SEQUAL, said financial planning clients, particularly super investors, are suffering from poor investment returns and planners are increasingly considering reverse mortgages to bridge the gap.

“Financial planners haven’t to date been the biggest source of reverse mortgages; [but] they are now increasingly looking at a reverse mortgage,” he said.

For an industry focused to a large extent on those approaching retirement – the baby boomer generation – a client’s home is a relatively untapped source of wealth.

Senior financial analyst at Canstar Cannex Harry Senlitonga said the baby boomer generation would retire in the next five to 10 years, and the majority of their wealth assets were locked in the home.

A Reserve Bank of Australia bulletin of household wealth earlier this year corroborated his comments. It showed that residential property accounted for 60 per cent of the value of a household’s total assets, up from 54 per cent seven years ago.

Conlon said the ageing demographic of the baby boomer generation will spur further growth in reverse mortgages as a financial planning strategy.

“It is clear that the dealer groups, if not the industry body, are recognising that their practice has to extend to serve the needs of their ageing clients.

“My belief is that reverse mortgages will form an important part of the financial services industry as the demographics start to show itself in a more obvious way than it has today,” he said.

Martin Lynch, head of reverse mortgages at Royal Bank of Scotland (RBS), said for a strategy as prone to demographics as reverse mortgages, financial planners were beginning to recognise it as within the sphere of wealth accumulation.

“Aged care planning tends to be something that financial planners see as their bread and butter,” he said.

However, Lynch noted that the greatest number of users of reverse mortgages were about 74 years old, and the expected interest from baby boomers was still some years away.

“The number of people aged over 80 in Australia doubles in the next 15 years, so that’s when the growth is going to soar.”

Lynch also attributed increasing interest in reverse mortgages to aged care facilities, which were becoming more aware of the strategy for future residents.

In the past, those heading for aged care accommodation typically sold their homes to pay for their entry into, and costs of, the facilities.

With the increasing use of reverse mortgages, potential clients could utilise a reverse mortgage product to purchase an accommodation bond for an aged care home without making a decision to sell their home.

Education and awareness

Despite the increasing interest, there is a lack of awareness and education among both consumers and financial planners about how to use reverse mortgage products.

Paul Intagliata, a financial planner at Aged Care Financial Services, said criticism of reverse mortgages in the media stemmed from a lack of information about what sort of clients were suited to the strategy.

“I think, in general, there’s been a lot of inaccurate information put out in the media over the last three or four years about reverse mortgages,” Intagliata said.

“For the right person who gets the right advice, they can certainly be a valuable asset as part of a package to help with retirement or aged care. But the important part is the advice – they’re certainly not suitable for everybody. People need to plan correctly in utilising them,” he said.

The Australian Securities and Investments Commission (ASIC) warned earlier this year of the misuse of reverse mortgages, and released research showing that consumers found it difficult to understand home equity release products.

At the time, ASIC chairman Tony D’Aloisio said while equity release products offered benefits, there were also significant risks, including consumers being encouraged to borrow more than they needed against the value of their house.

However, ASIC based its research on data from 2005, and possibly even earlier, according to Lynch.

“I had presented to [the regulator] hard evidence that people are using reverse mortgages wisely and borrowing what they need, rather than what they qualify for,” Conlon said.

Research from RBS revealed that consumers were only borrowing up to 17 per cent of the value of their home when they qualified for a loan of up to 30 per cent, he added.

Despite this apparent wariness, Conlon said there was a poor level of understanding among financial planners about the nature of reverse mortgages.

“I worry about the risk of a financial plan reflecting the preferences of the adviser rather than the client. Much of what I have heard in financial planning forums has been opinion based. The fact is they’re not even considering the family home as existing exposure to property.”

Industry consultant Paul Resnik said the suitability of a reverse mortgage depended on the client’s circumstances.

“It is always better to do things knowing the consequences. In the hands of a good adviser who understands how clients’ needs or circumstances change over time, it may be a good idea or a bad idea,” he said.

“We don’t sneer at downsizing the house; somehow we sort of sneer at reverse mortgages, as if there’s something inherently bad about them,” he added.

Credit crunch

One of the issues financial planners face if they recommend a reverse mortgage to a client is the tightening credit environment.

“It’s very difficult. Virtually no provider is able to get unlimited funding [at the moment],” Thomas said.

“Some providers are not writing any business, some providers have gone out of the business, and most providers are limiting their lending.

“It’s affecting the [reverse mortgages] sector fairly dramatically,” he said.

Eight reverse mortgage lenders have withdrawn from the market in the space of six months to January this year, according to research released by Canstar Cannex, with many reverse mortgages falling victim to funding shortfalls.

Intagliata said lenders had become stricter in approving certain loans.

“We’ve certainly seen a bit of tightening of LVRs [loan to value ratios] of certain loans that perhaps 12 months ago would have been fine, and now there’s been a reduction in the amount of money [for loans].”

Across the board, most mortgage providers have been “pretty rigid” in terms of their LVRs, with lenders only willing to lend up to 40 per cent of the value of the house, he said.

Lenders may look at loosening that down the track, but it’s too hard to determine if that would be the case, Intagliata added.

According to Senlitonga, both banks and consumers are taking on risk because of the compounding effect of the interest on the loan without repayments from the borrower.

Reverse mortgage lenders may be willing to lend up to 30 to 40 per cent of the value of the house, but no higher than that in the current environment.

According to Senlitonga, current property prices and interest rates are factors that financial planners will have to take into account.

Lenders factor current property prices into loans, so any change in property prices was an important issue for lenders to consider, he said.

However, lenders typically look at house prices over a 10 to 15-year range as the basis for their pricing models, he added.

But, according to RBS’ Lynch, the property sector did not affect reverse mortgages “particularly significantly”. While lenders’ valuations were conservatively estimated, which would “ruffle a few feathers”, as long as borrowers were getting the amount of money they needed, there was no reason they would be concerned, he said, adding that the average LVR of his bank’s customers was approximately 18 per cent.

He also believed that because LVRs were so cautious in the current market, the risk from rising interest rates and house prices was negligible.

SEQUAL’s Conlon believes the “key issue” for consumers is that the market remains liquid.

He said the real risk was to the level of competition and the benefits that flow to consumers from the competition.

Despite the issues the sector is currently facing, Conlon believes it will recover and expand.

“I do think this is a market worth watching,” he said.

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Home-based Mortgage Broker Businesses, a Growth Industry

With today's job losses and downsizing, plus increased cost of living, many people are looking for business opportunities that enable them to work from home. We, here at Professional Financial Associates, have a proven opportunity that provides both training and support to anyone willing to learn.

Dana Point, CA (PRWEB) August 29, 2009 -- Professional Financial Associates (www.pfa.com) announces the launch of its "New" Home-based Mortgage Broker Business program to assist those who are looking for career opportunities in home-based mortgage lending.

Due to increased unemployment and concerns about the loss of income due to downsizing as well as the skyrocketing cost of living, many people are exploring the possibilities of operating a business from home. Today, more and more people are looking for a business that will enable them to earn an executive income from home. They are looking for a business plan that gives them several avenues for generating income. Although there are many options available to people wishing to run a home-based business, one that has proven to be successful and profitable over many years has been the home-based mortgage broker business.

Like many home-based businesses, the home-based mortgage broker business is simpler if you have someone who can lend you a guiding hand and get you off on the right foot. Professional Financial Associates (PFA) has more than thirty years experience in this business and can now offer you the training and support necessary to enter into this lucrative field. All you need is to be willing to learn!

The Home-based mortgage broker business is not dependent on managing outside employees, purchasing inventory, and doesn't incur large start-up costs. Plus, with interest rates and real estate values extremely low, now is the perfect time to take advantage of career opportunities in home-based mortgage lending. PFA understands that the biggest road block to starting your own business is getting the needed training and support. The PFA Registered Loan Broker Home Training Program will provide you with all the tools you need to move forward.

One of our customers, J.C., an insurance agent who was already working from home, watched as his business began to decline due to today's economic climate. He applied and received training through PFA's home-based mortgage broker business program (http://www.pfa.com). J.C. began offering FHA, VA, Conventional, and Reverse mortgage loans to homeowners wishing to refinance at lower rates, as well as home buyers wanting to take advantage of the lower real estate prices and interest rates. Today, J.C. has not only replaced his lost income from reduced insurance commissions, but has generated a new and very profitable income stream that well exceeds what he was making on his insurance business alone.

So, with foreclosure rates on the rise, short sales looming and property values and interest rates both at record lows, there is no time like the present to take advantage of the career opportunities in home-based mortgage lending. By opening your home-based mortgage broker business and completing our Registered Loan Broker Home Training Program, you will receive all the training and support you require to guide you down the path to a successful career in your own home-based mortgage broker business.

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Reverse mortgage defined

Before reverse mortgages came into the market, the only way to receive any money from your home was to sell it, or to borrow against it, requiring monthly loan repayments. Reverse mortgages allow homeowners to get money from their home while still living in it, and making no payments.

The reverse mortgage loan is against your home that you do not have to pay back for as long as you live there. The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage program insured by the Federal Housing Administration. It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. Rates are estimated by a margin, which is, in the HECM program, the amount added to the one-month Libor index to determine the initial and current interest rate. You pay the money back plus interest when you die, sell your home, or permanently move out of your home. The Federal Housing Administration (FHA), part of the U. S. Department of Housing and Urban Development (HUD) that insures HECM loans, requires lenders to offer an adjustable rate mortgage, which is an interest rate that changes based on changes in the market-rate index.

To qualify for a reverse mortgage, a prospective borrower must be at least 62 years old and own his or her residence. They must also submit an application to the lender and have the property inspected. In some cases, certain repairs may be required before the lender will approve the loan.

The size of a reverse mortgage depends on many factors, including the borrower's age, the type of mortgage sought, the value and location of the property, the borrower's equity, and current interest rates. As with a traditional mortgage, lenders typically charge an origination fee, an appraisal fee, and other miscellaneous fees.

Generally, borrowers may elect to receive their payments in one of three ways: through a lump sum payment, a series of fixed payments, or as a line of credit which can be drawn upon when the borrower needs the money, letting the borrower decide when and how much money to take out. Occasionally, homeowners will choose some combination of these methods. A reverse mortgage usually comes due when the borrower no longer lives on the property.

Under FHA insured reverse mortgages the borrower receives a guarantee that payments will continue to be made even if the lender defaults. For this reason, a FHA reverse mortgage may offer smaller loan amounts than other programs. This type of reverse mortgage remains in effect as long as the borrower lives in the house.

Reverse mortgages can be a useful planning option for elderly homeowners in need of extra cash. Not only do they provide a steady stream of money, but they also remove what is often the largest monthly expense. Typically, no house notes are due while a reverse mortgage is in place. Furthermore, because reverse mortgages are technically considered loan advances, they are generally not subject to taxes. Most importantly, though, they allow borrowers that might have otherwise been forced to move an opportunity to remain in their homes.

A thirteen-year veteran of the mortgage industry, Robert Griffin specializes in reverse mortgages and has helped over 3000 Americans find financial security with a reverse mortgage. The owner of Griffin Financial Mortgage LLC, based in Fort Worth, Texas, his memberships include the National Association of Mortgage Brokers (NAMB), the Mortgage Bankers Association (MBA), the National Reverse Mortgage Lenders Association (NMRLA) and the Better Business Bureau (BBB). Robert Griffin is also co-author of “62 Senior Moments.” If you would like more information, please call (866) 683-3690 or complete our online Reverse Mortgage Information.

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Another way to look at reverse mortgages

In the business world, it is common practice to initiate a product for one purpose, then try to increase sales by marketing that same product to a wider group and, at the same time, changing the purpose. It now seems that reverse mortgages are falling into that category.

Reverse mortgages were initiated some years ago for the purpose of assisting elderly homeowners to live out their later years more comfortably. With a reverse mortgage, homeowners who were strapped for income could not only pay down their existing mortgage, but could also have extra cash to provide for their needs. Now they had no more mortgage payments and the cash to stay in the home for the rest of their lives. The government liked the idea so much that it guaranteed reverse mortgages in a few ways, taking the lender entirely off the hook insofar as risk goes:

o If the value of the home dropped to below the amount of the mortgage, taxpayer money reimbursed the lender.

o If the homeowner failed to pay the taxes and maintain the home, the Government, and not the lender, took the property in foreclosure.

Reverse mortgages were intended to bail out older homeowners. It was a way to allow them to keep and live in their own homes in their old age.

The purpose of reverse mortgages has not changed. It is a good way for elderly homeowners to remain in their homes--but only as a last resort and only when no other avenues exist. A reverse mortgage is expensive and complex--it is not as simple as a conventional mortgage.

According to Consumer Reports, "unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to by financial products such as deferred annuities that can be inappropriate for their situation. And the required counseling can be skimpy." To me, such a practice is reminiscent of what was touted as a "pension-maximization plan" back in the 1980s. Here, a married wage earner was encouraged to choose the higher single-life pension and with the difference (between the higher single-life and lower joint-and-survivor pensions) buy a life-insurance contract on the pensioner. While it may have worked for some who had many options, this was usually a way to sell more life-insurance products.

How does a reverse mortgage work? Only homeowners older than age 62 are eligible. You apply for a loan amount that will pay off the existing mortgage plus some extra to cover living expenses. Of course, maximums apply. According to Consumer Reports, "for a $300,000 home in the New York City area, the maximum available was $152,074 for a 64-year-old and $182,541 for a 74-year-old." So, even if the amount received is only enough to pay off the existing mortgage, just this relief from monthly mortgage payments can tip the balance in favor of the homeowner's staying in the home.

Fees for reverse mortgages are not like those of conventional ones. Fees are steep and are added to the loan amount up front. In addition, interest rates are usually adjustable, and the interest simply keeps getting added to the loan amount over time.

A reverse mortgage is just a mortgage, so the homeowner still continues to own their home--as long as they maintain the property and pay the taxes. When the homeowner dies, the mortgage must be repaid and the home can go to your heirs. But what if the mortgage amount exceeds the value of the home and there are no funds in the estate to pay down the mortgage? The property is foreclosed and then owned by the government, not your heirs.

Reverse mortgages are an expensive way to pull money out of a home for purposes other than day-to-day living expenses. Not for lavish spending--and certainly not for investing. Consider what would happen if you took a reverse mortgage and spent or lost the extra funds. Would it be enough to live in a house without any mortgage payment? Could you afford the increasing taxes and maintenance?

Some things work well on paper with simple illustrations and assumptions. Real life adds the complications that were never considered in the simple illustrations. Before signing up for a reverse mortgage, it would be a good idea to seek the advice of a trusted friend or counselor--or an independent financial adviser. A reverse mortgage can be just the right product for those in dire straits and nowhere else to turn. But for those with somewhere else to turn, it would be better for them to do so.

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