Friday, 16 July 2010
Reverse Mortgages – Part 4: Do Not Fear HECMs
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