REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

HUD released the new mortgagee letter for HECM home purchase yesterday with the date of January 1 for the date of earliest application. What does that mean? It means you can use the remaining equity from the sale of your current home to purchase a new home as long as you intend to live in the new purchase and can prove it within 60 days of purchase. We described a bit of how it worked yesterday on this website. Here is a breakdown to follow up with the example used yesterday as well as information that real estate agents will drool upon hearing.

First, lets look at the example again and break it down further. In the example, someone 62 or older in a $400,000 home that intends on downsizing or moving into a different home upon retirement can take advantage of this new capability of using a reverse mortgage to assist in the financing of a home purchase. They could pay the entire purchase price using the proceeds of the sale of their current home, thereby not having a mortgage payment, and only have to pay taxes, maybe condo or association fees and homeowners insurance. But by using the reverse mortgage capability, they could put down a percentage of the value of their purchase and finance the other portion and not have monthly payments to make. This would maximize their retirement income by keeping more cash available for them to use in retirement instead of being tied up in property.

What we didn’t mention yesterday was that in this type of financing, there is no credit requirement, no income requirement which means there’s no debt to income ratio to be concerned with or qualifying documentation to deal with. If the person is 62 or older and can verify a certain amount of cash they will be able to put down on the home purchase, they qualify based on the reverse mortgage requirement. It is almost impossible for someone on fixed income to finance a purchase today without considerable liquid assets, either cash in hand or 401K. In most cases, banks want to see up to 6 months of the fully amortized payment as reserve for the purchase of the home. In addition, they are looking at monthly income that will cover the payment but with debt to income ratio’s in the high 30% range, meaning after payment is made, your remaining montly income makes up the other 60-some percent. Well, most folks on fixed incomes don’t have that kind of capability nor do they need to now with this great HUD resource- the reverse mortgage for home purchase.

In the example below, a 70 year old purchasing a $150,000 condo would only have to put $61,247 down on that purchase and the other part- or $88,753, would be financed using the reverse mortgage. If they were selling a $400,000 home, they would now have $338,753 minus any real estate commission and moving costs. This maximizes their retirement cash flow and allows them to do more of the things they had planned on doing upon their retirement that they could not have done before and the reverse mortgage is what gave them that opportunity. If they didn’t want a mortgage payment, they could have put all $150,000 down but it would have left them with $250,000 minus real estate commission and moving costs. Using the reverse mortgage increased their retirement cash flow by 35%.

Editors note- product release date closer to first week of February.

WHAT OTHER RETIREMENT PLANNING METHOD GIVES THE CLIENT A 35% INCREASE IN CASH FLOW WITHOUT SELLING A LARGE PORTION OF THEIR PORTFOLIO OR CASHING IN A LIFE INSURANCE SETTLEMENT?

What would you pay for access to $367,516 that you didn’t have to repay, ever, for as long as you lived in your home? What if you could gain access to that or a portion of that amount any time you wanted to, within 5 days of mailing in the request and you could do anything you wanted with it? What if that money was tax free? What if that money continued to grow in value and could be as much as $445,172? OR MORE?

How many more questions do I need to ask before you start saying “yes, yes, yes, lets have it? There’s got to be a trick here somewhere.”

I posed that question to a senior that was watching his retirement portifolio fall and fall and fall until he saw over $200,000 disappear in 6 months. His financial planner told him not to panic and he held pat at 80!. Holding pat at 65 may be a little easier to swallow but 80 is another story. How many years will it take to make up $200,000 in a retirement fund and what if that client needed money for a big ticket item like new roof, spousal care, companion care or anything for that matter? And what if they did take money from the remaining retirement account; they already lost $200,000, how much is left?

Of course there’s something left, they didn’t lose everything, but they lost a big portion, not because it wasn’t allocated properly, but because everything went down. I posed my question to this person because I told him he had a way to create a fall back plan and I wanted to know if it would help him sleep at night and he said its scaring him to death waiting for the other shoe to drop. For those saying he should move if he can’t afford to live there, his reply was that the home meant too much to him to move and with lower values and hard to come by credit for potential buyers, selling wasn’t even an option. “Where will I put my furniture and all my memories, there’s no room in a condo for all of it?”, he said.

How does he have access to $367,516? That’s the amount his original reverse mortgage credit line of $303,407 would have grown to in 5 years if he secured a reverse mortgage today at the age of 80 in a home worth $875,000; and that $367,516 is a conservative number. The credit growth rate is based on the 1 year Treasury or CMT (and its hovering near historic lows, currently 1.24) plus a margin of 1.75 to 2.00%. The average credit growth rate for reverse mortgages over the past 15 years is in the 6.20% area meaning his original $303,407 could be more like $397,998 if the index increases by just 2.00%. The $445,172 is the growth in 10 years using today’s growth rate, again at almost historic lows. If the CMT increases, his credit growth increases. This particular client isn’t in a house rich, cash poor position like we think of when that phrase is mentioned. He’s got cash and he’s got a house but he’s not rich. His quality of life just took a big hit and he’s got a way back into the game through a reverse mortgage.

He can use this money at any time he wants and if he doesn’t choose to, the costs are nominal for guaranteed growth. How much would be pay for access to $367,516?


…drumroll…NOTHING, not one penny…a reverse mortgage costs nothing out of pocket!

Edit: After multiple contacts from Seniors with lower home values, here is a breakdown for someone in a $300,000 home using the new fees to be put in place on or about November 1st.

A 70 year old couple living in a $300,000 home in Kansas would have access to $189,375 after November 1st. That money left in the reverse mortgage credit line for 5 years will accrue to at least $225,238 and in 10 years to $268,112. They, again, can use that money at any time, for any purpose and not have to pay it back until they pass away or move from the home.

Please let www.reverse-mortgage-information.org know if you would like to have your own scenario run.

The recent signing of the HOUSING AND ECONOMIC RECOVERY ACT OF 2008 (HR 3221) by President Bush puts into motion something that has been long in the making and that’s a modernization of FHA rules for reverse mortgages. Some of the changes facing potential reverse mortgage clients are an increase in the national lending limit from the individual county limits now in place. Folks in some parts of the country will see their lending limit rise from as low as $200,160 to an anticipated $417,000 and that’s good news for those with home values over their county lending limits since any equity access was determined from the lower of the appraised value or the respective county lending limit. In many cases where the reverse mortgage was to utilized to pay off an existing forward mortgage there wasn’t enough cash access to pay off that mortgage and the borrower either had to come to the table with money or look for alternative methods which often led to selling the home and in a down market, that’s neither easy or fun.

Another change is with the origination fee, currently capped at 2% of the lesser of the appraised value or the county lending limit. The new bill will keep the 2% up to $200,000 but cap the origination fee at $6000 which is more than $1200 less than some of the highest fees where county lending limits were as high as $362,790. In that case, 2% of that amount would have resulted in an origination fee of $7255.80.

Higher lending limits combined with lower origination fees are great for those seniors whose circumstances have them looking at ways to increase their monthly cashflow without making risky investments in a roller coaster stock market.

Some new additions to the bill are for folks in co-ops and those looking to use the reverse mortgage as a finance tool to help them purchase a home, most likely in a downsizing event. Currently, only New York co-op owners are able to secure reverse mortgages because of their prevalence. There are other pockets of the country with co-ops and this will be a relief for those co-op owners as other means of financing have disappeared as most boutique programs are no longer available. In the event someone wants to downsize from a larger, more expensive home, the ability to purchase a home using a reverse mortgage is also a welcome addition. As an example, someone in a $400,000 home can sell the home, take a portion of the proceeds for purchase of a less expensive home, say $200,000, and instead of putting up the entire value in cash, they can put down a small portion, in this example, half of the value and finance the other half and not only do they eliminate monthly mortgage payments, they keep a larger portion of their cash in their pocket and in this market, cash is king. Instead of having $200,000 left over from the sale of the home, they now have $300,000 and no monthly payments as long as they live in the home. That’s also great for those that don’t currently qualify for a regular mortgage because of bad credit or insufficient fixed monthly income as those programs have gone the way of the other boutique programs once offered by most forward lending brokers.

Some other features are a prohibition against requirements to purchase additional products as a condition for HECM eligibility such as annuities or life insurance policies. That is good news as the recent negative information about reverse mortgages has been because of this very practice. Folks short on cash flow that need a reverse mortgage should not have their money tied up in any annuity, be it immediate or deferred. The reverse mortgage provides more cash flow with less restrictions than the annuity could anyway in most situations where monthly cash flow is short. Another mention is about a study to determine consumer protections and underwriting standards for HECMs which will help to insure that purchase of any additional products by a consumer is appropriate for the consumer.

We like the new changes, they are consumer protection focused and open up opportunities to help save some homeowners from increasing monthly payments on their forward mortgages that were having a harder and harder time making that increased payment amount and the homebuying function is a great tool for credit challenged or those looking to downsize into more affordable housing.

The question goes to the heart of the reverse mortgage equation and is the subject (and title) of a recently released study/survey from Boston College’s Center for Retirement Research.

Tapping home equity to pay for retirement living expenses is been viewed by the current generation of retired homeowners as a last resort. Many still receive defined benefit pensions and, though they have accumulated substantial home equity, regard it as, at worst an insurance policy against catastrophe and, at best, as a bequest to be left for children or charity.

The purpose of this study is to determine if attitudes among soon-to-be-retired babyboomers are any different with regards to using home equity for retirement. After all, the home is now the major form of savings for most households, fewer babyboomers can count on the security of a defined benefit pension and the majority of households recognize they have not saved adequately for retirement.

Nonetheless, nearly three-quarters of the survey respondents said “no” they do not plan to use accumulated home equity for ordinary living expenses in retirement. Only six percent had plans to use their home equity and twenty-two percent were not sure. The study identifies three characterisitics as important factors in explaining the “yes” responses:

• people having expectations of an inadequate retirement income were more likely to expect to use home equity;
• interestingly, people having an outstanding mortgage (i.e. not “paid-off”) were more likely to expect to use home equity for retirement living; and,
• type of pension plan: respondents with less secure “defined contribution plans” (as opposed to guaranteed “defined benefit” pensions) are more likely to expect to tap their home equity in retirement.

The study also asked about how people who expect to use their home equity in retirement will actually access the resource. Overall, 15% expect to do so via reverse mortgage. Surprisingly, as the following table from the study shows, older respondents are less likely to use the reverse mortgage vehicle.

A further breakdown of the characteristics of people planning to utilize reverse mortgages is provided in the detailed survey data:

Some observations:

• only 23 out of 2,673 survey respondents (less than 1%) think they will use a reverse mortgage to access home equity in retirement;
• only 2% of divorced, separated or widowed respondents who will access home equity for retirement think they will use a reverse mortgage. The overwhelming majority of this group think they will access their home equity by downsizing.
• singles, females and blacks appear the groups most likely to opt for a reverse mortgage. This concurs with the recent HUD-sponsored study that showed single females to be the dominant borrower group in the Home Equity Conversion Mortgage (HECM) program.

This Boston College survey data is interesting but should be taken with a grain of salt. For one thing, as noted, the sample size for people planning to use a reverse mortgage in retirement is quite small. For another, the results may also reflect a delay or aversion on the part of many to come to grips with retirement finance realities. The study’s authors put it this way:

But given that the retirement landscape is becoming more treacherous, that picture may well change. Indeed, the equation suggests that being inadequately prepared for retirement, having to rely on a defined contribution plan, and having a mortgage are all positively related to plans to tap home equity in retirement. These factors — inadequate preparation, reliance on defined contribution plans, and having a mortgage in retirement — are all on the rise, suggesting that a similar survey five years from now will show significantly more people planning to tap their housing equity to cover living expenses in retirement.

We’ve previously reported findings from the the extensive HUD-published study of HECM loan terminations: . The study analyzes historical data on HECM loan terminations and presents important findings on the tenure of reverse mortgages by borrower classification and age categories.

Our interest in the study was to cull information that would be useful to potential reverse mortgage borrowers. However, the thrust of the study is to present data to help facilitate development of a private secondary market for reverse mortgages. In a recent , Ginnie Mae specifies just how the study will help facilitate this goal:

“This groundbreaking research will enhance the development of a secondary market for HECMs; it provides keen insights regarding the timing of HECM loan terminations; and, will greatly assist secondary market participants in assessing HECM loan performance,” said Robert M. Couch, President of Ginnie Mae.

“This type of information is vital to the emerging HECM market because it will help structure securities more effectively and it will help investors to price the HECM security efficiently-all of which will ultimately benefit senior home owners seeking to tap into the equity of their home,” explained Couch.

The newly released study comes as Ginnie Mae prepares its first HECM Mortgage-Backed Security (HMBS) for issuance in 2007. The Ginnie Mae HMBS will allow approved issuers to securitize and sell FHA-insured reverse mortgages in the form of a Ginnie Mae security. The Ginnie Mae HMBS will provide the mortgage-backed securities marketplace with a full faith and credit vehicle for the securitization of HECMs. The HMBS will increase liquidity by providing capital market funding sources to primary market HECM lenders, broadening distribution channels for HECM loans and expanding the investor base for the HECM product.

The PD&R research addresses the critical need for information by analyzing FHA’s historical loan level data on HECM loan terminations-a major factor in assessing loan performance. Reverse mortgages do not have a repayment schedule like traditional mortgages and are typically not repaid until the borrower dies, moves, or refinances. As such, reverse mortgage terminations are primarily driven by rates of mortality and mobility, which is the timing of borrower deaths and voluntary loan payoffs associated with moving out of the mortgaged property. Understanding loan termination behavior and the expected cash flow is vital to supporting a robust secondary market for reverse mortgages.

The results of this analysis are critical not only for program operations and private market product development, but also for developing an effective secondary market for HECM loans. Importantly, this study reflects FHA’s commitment to create an efficient market for HECM loans through a robust disclosure strategy.

Ginnie Mae is the quasi-governmental issuer of mortgage-backed securities that facilitate liquidity in the mortgage market. Ginnie Mae securities carry the full faith and credit guaranty of the United States government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make. As noted above, Ginnie Mae plans to expand activities into the reverse mortgage arena in coming months.

We wrote recently about a HUD-published study that looked at the “survival rates” of Home Equity Conversion Mortgages (HECM). The study’s authors sought to provide factual data about HECM loan pay offs that would be useful to investment bankers and others interested in development of an efficient secondary market for reverse mortgages.

Our earlier comments focused on data reported for all age groups of HECM borrowers and we found particularly noteworthy the fact that more than half of HECM loans are paid off (i.e. do not “survive”) beyond year six of the loan. This is noteworthy because financial advisor’s typically counsel that a 5-7 year HECM loan term generally is needed to amortize the high upfront costs and make the reverse mortgage a reasonably efficient borrowing tool.

The authors also studied HECM loan survival rates for three distinct age groups:

“younger borrowers (defined as those ages 64 to 66 at closing), typical borrowers (defined as those ages 74 to 76 at closing), and older borrowers (defined as those ages 84 to 86 at closing).”

The following graphs are based on data from the and show HECM loan termination rates for three categories (single female, single male, and couples) further broken out by age groups:

Observations:

• Most surprising is the fact that among all categories (female, male, couples) there is little difference in the observed termination rates between younger borrowers (64-66) and typical borrowers (74-76).
• Older borrowers (84-66) pay off their loans much faster than younger or typical borrowers due to higher mortality rates. The study notes “(t)his faster payoff results in the 10-year loan survival rate for older borrowers being observed at only 10 percent.”
• As expected, older borrowers (84-86) pay off their loans much faster than younger or typical borrowers due to higher mortality rates. The study notes “(t)his faster payoff results in the 10-year loan survival rate for older borrowers being observed at only 10 percent.”
• Only couples in the young borrower (64-66) group have better than a 50% HECM loan survival rate beyond year six. For all other groups, more than half of the HECM loans have been repaid by this point. For single males in the older age group (84-86), less than 1/5 of the loans survive into a seventh year.

Once again, the information provides a useful reality check for homeowners considering a reverse mortgage. The data show that a large share of HECM loans are paid off in relatively short periods – likely shorter than borrowers anticipated when the loans were taken out. The high upfront costs associated with HECM reverse mortgages can mean extremely high overall borrowing costs when loans are outstanding for shorter periods of time.

A recently released by HUD’s Office of Policy Development and Research sheds light on the characteristics of HECM borrowers and shows how the “typical” borrower has changed in recent years as the HECM program has matured:

Single females homeowners are still the dominant HECM borrower group, but single males and, especially, couples are an expanding presence in the market. “Couples”, incidentally refers not just to married couples; as used here the term applies to all HECM loans with two co-borrowers, irrespective of gender.

The purpose of the report is to provide data on HECM loans that will “enhance the development of an efficient secondary market for HECM loans”. Development of a secondary market able to attract private investor dollars is viewed by many as critical to the future growth of the reverse mortgage industry and to the removal of program obstacles (like high costs).

The study focuses on the rate at which HECM loans “terminate” (i.e. loan payoff due to borrower death, move-out, or other voluntary payoff such as refinancing) – a key consideration for investors looking at cashflows. There are several interesting and useful facts contained in the report relative to HECM loan terminations that we will discuss in future posts.