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Friday, 16 July 2010

Reverse Mortgages – Part 4: Do Not Fear HECMs

category_bug_journal2.gif This week, I met in person with each of the three prospective reverse mortgage lenders I had spoken with on the telephone. They had all emailed comparison estimates of types of HECMs I might choose showing interest rates, loan amounts, monthly payouts, closing costs, etc.

These people are not the actual lenders; they are originators who work with banks – usually several – with which they place the reverse mortgages they originate.

All three, who deal only in reverse mortgages (no forward mortgages), are knowledgeable about the many details of HECMs and I was struck by how passionate and compassionate they are – two of them in particular - about helping elders to a more comfortable old age if possible.

Two confirmed something I had read in several places online; the number of reverse mortgages is down this year. One hangup is that in 2009 HUD reduced loan amount limits by 10 percent. A related reason is that fewer people (no more than one in 30, one lender told me and another confirmed) can qualify for reverse mortgages nowadays because they have increased their forward mortgages through refinancing over the years and/or have outstanding lines of credit leaving too little equity to qualify for a HECM.

The rule is that outstanding liens on homes must be paid off from the proceeds of a reverse mortgage and in fact, some people use HECMs for that alone – to eliminate a mortgage payment - and do not take any cash. So if the equity isn't there, two of the lenders told me, they can't do anything to help elders, some of whom are in terrible financial trouble with nowhere to turn.

For a long time, reverse mortgages have been seen as a last resort to use only in desperate circumstances when money is needed and there is no other source to tap. One of the reasons reverse mortgages have had such a bad reputation is that until a few years ago, lenders were allowed to make the loan with one hand and simultaneously sell the borrower another kind of financial instrument – sometimes fraudulently - with the other hand.

Unscrupulous lenders might, for example, sell the elder an annuity that did not pay out until he or she was 100 years old, or something equally repellent. That has not been possible for some time; lenders are forbidden by HUD to sell any other financial products to their reverse mortgage borrowers.

Still, the belief that this happens hangs on – so much so that just about any explanation about HECMs, including consumer advocate organizations and mainstream media, includes a warning about fraud - almost always about those annuities that never pay out.

It is gradually being recognized, however, by people who take the time to investigate the reality of HECMs, that reverse mortgages can be one more tool in planning for a reasonably secure retirement.

Many elders lost large percentages of their life savings and investments in the 2008 crash and therefore lost a chunk of income they had planned on and saved for. For others, pensions have been whittled down or have even disappeared due to corporate bankruptcies. And homes many elders had long expected to sell to help with their retirement have lost value or, in the current real estate climate, can't be sold at any price.

All this leaves elders, after a lifetime of planning, high and dry with no place to turn.

But if there is a good deal of equity in an elder's home or, even better, it is mortgage-free, many – including me – are beginning to see no reason to leave that money sitting there doing nothing. One of the lenders I met with told me of meeting with an elderlaw attorney recently who, until they spoke, had no idea about how a reverse mortgage works and the value it can have for his clients.

There is no reason to be afraid of a HECM, but the details can be daunting so you do need to do your homework.

The closing costs for a reverse mortgage, including the loan original fee and the mortgage insurance premium, are higher than for most forward mortgages, but they are added on to the mortgage – or, rather, are deducted from the proceeds the borrower receives. In my meetings with the three lenders, each gave me estimates of the costs and proceeds of several types of mortgages using the purchase price I recently paid as the appraisal estimate, and walked me through all those numbers, interest rates and caps, service fees, etc.

And, as I said above, they are all knowledgeable, experienced and likable people. I would have no difficulty working with any of them, so choosing one would be difficult. Except...

Most of the closing costs and upfront fees are set by HUD. The variable is the origination fee (also deducted from the proceeds of the loan) which has, in recent years, been in the $3000-$5,000 range. This year, however, lenders are increasingly reducing the origination fee and even swallowing all or part of the upfront mortgage insurance premium, which is substantial – two percent of the loan proceeds.

Two of my potential lenders gave me estimates that included the standard origination fees; the third reduced it by more than 75 percent. In the end, this entire endeavor is about money for my future.

Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage
Part 2: The Basics
Part 3: Finding a Lender
Part 5: The Mandatory Counseling Session
Part 6: The Home Appraisal
Part 7: Lender Conditions


At The Elder Storytelling Place today, Olga Hebert: Chuck Visits the Garden


Posted by Ronni Bennett at 05:35 AM | Permalink | Email this post

Comments

This is really great information, Ronni. You'll make a big difference in your followers' lives... maybe mine!

Thanks for the information Ronni, my sister and I who both watched our savings evaporate in the economy but have paid for homes, have tucked this information away. As ever the advice to shop around with your list of questions is solid gold. Thanks.

Great stuff. From a financial planner (no, I do not sell RMs)CLU, ChFC.

Who wants to live where there are plastic flowers in the entry way,
bathrooms reeking with harsh chemicals, where pets that I am allergic to are allowed and where old people are there to be entertained without interacting with the young people in the community? Not me.

I don't want to be kept busy, I want to be totally involved and live in a multi-age community. Hopefully, there will be a way to integrate all the senior housing in the future so that all ages can interact. This age segregation is not for me.

Retirement and aging is not just a holding pattern it is a time of continued learning and growth and involvement. No amount of tummy tucks and face lifts will erase the fact that aging has become a bad word in our society. Let's bring the elders back into the mainstream.

Thanks for sharing your research. I like to keep up with possibilities from which I might benefit -- part of my wanting to know all the options philosophy. We never know what our futures may hold.

Ms. Bennett,

I am a CPA who until final retirement at 55, spent 33 years in the field of taxation. Feeling too young to have retired, about 6 years I was asked to look into reverse mortgages. As the typical CPA, I am very conservative and hated the very idea of this product.

In late 2004, some friends asked me to look over the finances of a widow we all knew. She was house rich and cash poor but she was still paying on a mortgage she could no longer afford. After calling a few lenders (not many in those days), it became apparent that the product would meet her need and could possibly still leave her daughter with a substantial inheritance. Her family, close friends, and I all agreed she needed an adjustable rate HECM. (There were no fixed rate HECMs back then and her circumstances still do not call for one).

Over five years later, her mortgage interest has averaged just under 3.25% and because of her conservative spending habits, she has money left over each month to save or spend. Her HECM balance due is still less than $200,000. Her home equity is now over $400,000 despite the ravages of the housing situation here in California. Today I am a Senior Vice President of the third largest originator of reverse mortgages in California.

In case you did not know many in our industry are reading your articles. We enjoy your frank discussions and gasp when we read anything you say which is wrong. To say the least we are watching your journey closely. All in all, you are doing a terrific job for your readers and we wish you the best. Your insights have taught me some things from the consumer point of view.

You have helped dispel many myths about the product. Well written. Great job. Well done.

Dear Ronni Bennett,

I came across your article today and after reading it I just had to write.

I have been a Reverse Mortgage originator for over ten years and I could not imagine doing anything else for a living. I am one of those people who you call “passionate and compassionate about helping elders." Most of my past clients are like parents to me and most of them are on my Christmas card list now. I love it when they call me out of the blue just to chat!

You are correct – the HUD reduction of the loan limits by 10 percent has really hindered the ability of so many of my potential clients to qualify. On the other hand, many of my clients who are facing such hardships as foreclosure or bankruptcy are able to use the Reverse as a true lifesaver. My job is incredibly rewarding.

Please keep up your good work and best of luck to you!

All the best!

Matthew P. Martin MN

Dear Ms. Bennett,
I have been originating reverse mortgages for over 5 years. I was never in the regular mortgage business. I have worked for two of the largest banks in the industry. I just recently left one to go to work for a company that allows me to provide more options than just one company's products. What you are doing by shopping is more important than ever. With the changes, there are many more choices in products and different fee structures.

The regulatory restrictions that have been coming out and that are about to come out do threaten the industry. Also, the lack of congressional funding of the FHA reverse mortgage program threatens it's existence. What this program needs in funding is a drop in the bucket of what Congress spends and it is disgusting that they cannot fund a program that helps the greatest generation in our country's history.

Keep up this important work.

Tim Ryan AZ

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