Question: We have read your column for years and would like to know if there have been any changes in reverse mortgages. My husband and I applied for a reverse mortgage in January but never followed through. We thought we needed the money to be available because we lost 80 percent of our stock assets since last fall. Then we decided not to go through with it. Now we decided we need the money, and the broker told us to use the old one. What is going on here?
Answer: Throughout the past year of credit crisis, the reverse-mortgage world has changed. Before to the credit crisis, reverse mortgages and the interest rates used were set mainly by the Constant Maturity Treasury index (CMT). Therefore, folks considering reverse mortgages would be given a printout called the HECM (Home Equity Conversion Mortgage) CMT 200. This printout would tell them that the interest rate would be based on the CMT and the margin (profit) that the lender would make (then not more than 2 percent).
These rates were generally set each Thursday and would remain in place for the following week. This was a stable and secure environment in which reverse mortgages earned a good reputation as a safe product.
As credit became more "plentiful," more lenders came onto the reverse-mortgage scene, and many RMs were "repackaged" and sold off in the secondary market, just like the geniuses who caused the crisis had done with other financial products. Now, that well has also run dry and, for the past year, Fannie Mae has been the sole purchaser of reverse mortgages. We all know what happened to Fannie Mae, which has now been mandated by the Obama administration to clean up its balance sheets.
Fannie Mae decided to "clean up" by dramatically changing reverse mortgages, changes that will force senior homeowners and their adult children to do more rigorous due diligence before doing a reverse mortgage. Fannie Mae is now increasing the "margin" or profit that lenders can receive. Theoretically, the lender can make more money, make the reverse-mortgage product look better in the secondary market, resell the reverse mortgages and make yet another profit on the sell in the secondary market.
As of April 1, all reverse mortgages went to "live pricing," meaning interest rates and margins will be fixed daily, not weekly.
Thus, when seniors are shopping for reverse mortgages, they must be sure to compare apples to apples because originators (salespeople) may try to hoodwink even the sophisticated potential borrowers by backdating their good-faith estimates and quoting products that are not even available on the market any longer. That is why your old application will not work.
When signing applications, there is no longer any kind of "lock" on the interest rate, et cetera, until the lender is ready to close the loan. Thus, neither the lender, the originator or the elder person will know what the final amount available for a loan will be until the loan is "cleared to close" when the originator locks the interest and margin at whatever the market offers at that time.
The basics of reverse mortgages not changed: They are still a non-recourse (no money over the fair-market value of house is paid back), no-payment option for senior homeowners. But the pricing and rates of these products have changed and need greater scrutiny by the proposed borrower.
Jan Warner is a matrimonial, tax and elder-law attorney. His colleague Jan Collins is a writer and editor. Send family-court questions to Flying Solo, P.O. Box 11704, Columbia, SC 29211 or send e-mail to readers@flyingsolocomments.com. Send elder-care questions to Next Steps, P.O. Box 11704, Columbia, SC 29211, or go to nextsteps.net. Editor's note: These columns are written with a national perspective and are for general guidance only. For Florida-specific cases, it's best to consult a local attorney.
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