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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