Seniors’ Guide to Reverse Mortgage: Part II

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The reverse mortgage industry has been deluged with challenges.

In June of last year, the industry’s ethical practices have been challenged following the release of the Consumer Financial Protection Bureau’s (CFPB) report.

The CFPB report pointed out that reverse mortgage products are too complex for seniors to understand and counseling is not enough to offset the effects of misleading advertisements and aggressive sales tactics in the industry. While there are indeed issues to be addressed within the industry, the report failed to include assessments from Home Equity Conversion Mortgage (HECM) borrowers in the development of its key findings, which earned flak from industry practitioners and financial planners alike.

Before 2012 ended, another report prepared by Integrated Financial Engineering, Inc. and commissioned by the Department of Housing and Urban Development (HUD) revealed that the mutual mortgage insurance (MMI) fund for HECM loans was at staggering $ -2.8 billion.

In response, the Federal Housing Authority (FHA) largely limited HECM product to HECM Saver. HECM Standard may only be used now with adjustable rate mortgage (ARM). HECM Saver, on the other hand, can be availed either through FRM or ARM.

Aside from placing a cap on FRM to mitigate the losses, HUD also plans to implement a financial assessment and establish a program similar to an escrow account.

The second and third part of this article series aims to provide 20 must-know about the current state of the reverse mortgage industry. For seniors interested to avail a reverse mortgage loan, these nuggets of truth can help them formulate smart and educated decisions.

On the current state of reverse mortgage industry:

1.)  The Reverse Mortgage Stabilization Act of 2013 was introduced in the U.S. House of Representatives in May in support for the authority sought by the HUD to make calculated program changes to shore up its insurance fund. The bill will enable HUD to protect reverse mortgage borrowers in an event the program’s losses necessitated a bailout.

2.)  On May 29, 2013, the National Center for Policy Analysis (NCPA) concluded reverse mortgages could be a useful tool, but should have limited government participation. NCPA’s report also recognized the inherent and lender-caused risk of reverse mortgages. The report found lenders failed to inform borrowers about their rights and responsibilities. FHA requires lenders to inform seniors about other less-complicated financial options aside from and financial implications of a reverse mortgage. The agency also requires lenders to verify if seniors have signed a contract or agreement with an estate planning service. Seniors should be aware of these rights before making any decision.

3.)  Following a cap on fixed rate reverse mortgage in April, adjustable rate loans increased by 90 percent with 50% utilization at closing. Jack Guttentag considered ARM loan, specifically line of credit, as the most beneficial payment option among reverse mortgage payment plans. Guttentag is Professor Emeritus of Finance at the Wharton School of the University of Pennsylvania. Seniors should know that the perceived risk associated with ARM in forward mortgage does not exist in HECM. In HECM, borrower has no monthly mortgage to pay.

4.)  The 13-year-old reverse mortgage industry in Texas, the second largest reverse mortgage market in the United States, passed the $5 billion mark in May. More than 52,000 seniors living in the state have accessed their home equity through a reverse mortgage since 2000.

5.)  A new program was launched targeting children of prospective reverse mortgage borrowers who are concerned about the parents’ decision to use the Home Equity Conversion Mortgage (HECM) program, and the impact the loan has on home ownership. Education remains a priority for players in the industry.

6.)  The reverse mortgage industry landscape has been changing including the origination type. Some lenders utilize the phone-origination approach while others are managing and growing call center operations. Seniors should be aware of the ethical practices in loan processing regardless of whether it is conducted through phone or call center.

7.)  The National Reverse Mortgage Lenders Association (NRMLA) suggested that HUD requires reverse mortgage borrowers to undergo a financial assessment test in order to determine whether borrowers are at risk for falling into default on reverse mortgage loans.

8.)  With the possible retreat of reverse mortgage loan limits back to $417,000 from their current level of $625,500, some analysts expect seniors with a high level of home equity to resort to jumbo reverse mortgage. Jumbo reverse mortgage offers more than $625,500 loan with a slightly higher interest rate than HECM. Borrowers, however, can only access the 25 percent of their home equity. The HECM loan limit is subject to re-approval by Congress in 2014.

9.)  HECM registered a positive cash flow in the first quarter of 2013. The HUD program’s negative subsidy rate of 0.92 percent indicated that revenues are greater than net claim expenses by almost 1 percent.

10.)  Industry experts believe that in 10 years, reverse mortgages will be as popular as Individual Retirement Accounts (IRAs) are today.

The next ten nuggets of facts about the current state of the reverse mortgage industry will be discussed in the third part of this article series.

 

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