The Controversial Reverse Mortgage

The Controversial Reverse Mortgage

 

The Reverse Mortgage, the mortgage many people are sure they don’t like and very few understand. We’ve been barraged with aging celebrities touting the benefits of the product while journalists condemn and discourage anyone from considering it. While the Reverse Mortgage can do everything the commercials say, there is often more to consider when getting one than the average loan officer may tell you. As a seven year veteran of the product I’ve seen many changes until the most recent version produced by the Consumer Financial Protection Bureau (CFPB). Most of the changes are very positive. Stay with me while I expose the Reverse Mortgage for what it was, what it is now and what it isn’t.

 

The HECM, Home Equity Conversion Mortgage with represents 90% of all Reverse Mortgages. With the HECM, I’ve helped customers to stop foreclosures, pay for in-home health care, pay property taxes, take a home off the market that hasn’t sold. Some borrowers only take out enough money to put on a new roof or add handicapped bathrooms for a livable environment. Others completely renovate the property using the Reverse like a renovation loan.

 

In today’s market, the majority of Reverse Mortgages are now done by a wealthier senior population. They are using the equity in their home much like an annuity. Working with their financial planners to use the equity in the property as another asset to ensure they don’t outlive their money. By drawing on the home equity line in a down market and balancing the HECM equity line of credit with their retirement account many seniors have weathered financial storms that could have been devastating.

 

A taboo with Reverse Mortgages is taking out cash to invest in annuities. Previously when un-informed financial advisors saw the retirees home as a cash cow. At age 62 many financial advisors told their clients to take the available cash out with a Reverse mortgage and they would invest those monies in an annuity. Unfortunately the homeowner didn’t have access to the cash for repairs, etc. This was bad advice because a Reverse Mortgage is already a type of annuity. If the homeowner leaves the available funds in an equity line of credit they aren’t paying interest on the funds but they’re accruing positive interest. Once they take the monies out to invest they are paying (accruing negative) interest and mortgage insurance fees. The investment annuity isn’t able to continuously earn more than the cost of borrowing. 

That was so popular and harmful to seniors the CFPB’s latest rule on September 30, 2013. Limited the amount of additional cash the borrower was allowed to take out at closing. Now, borrowers may only take 60% of the available funds at closing the balance must stay in the equity line for a year.

 

The biggest misconception is that you no longer own the equity in your property. That you are selling your home for 60% of the value. One of my borrowers and her husband had a Reverse on their large primary residence for ten years. After her spouse passed away the upkeep was too much for her. She sold the home, took the remaining equity ($140,000.) and bought a $200,000 ranch with a Reverse of Purchase ($100,000). That still left her $40,000 in savings and no mortgage payment as long as she lives. Another retiree just purchased a $300,000 home with $150,000 and plans on selling it in five years at a profit. Recently divorced retiree purchased a fixer upper with the reverse for purchase and plans on selling and doing it again in 2 years. The Reverse for Purchase is only a few years old and evidence that this mortgage product is changing for the better.

 

Let me explain why so many people believe it is bad and why the media hated the product. If you are living in a home that has a Reverse Mortgage and the person/ people who have their name on the Deed and Mortgage pass away you have a few options. You will need to either refinance the home into your name or sell the property and keep the proceeds (equity left) after the sale. If this sounds a lot like a traditional mortgage to you, you’re right, it is. Where it differs is because no mortgage payment is being made you must advise the lender in writing, within 60 days, of your intent. Then you must either sell or refinance within 6 months. If the homes mortgage is higher than the value of the home then the heirs or homeowner has the right to buy the home for 5% below the home’s appraised value. This should be sufficient to allow anyone to stay in the home, right?  The caveat in any home mortgage is that the borrower must qualify for the mortgage. If you plan on leaving your home to an heir residing in the property, make sure they will be able to qualify to refinance the loan into their own name.  Advise your heirs that they will receive a letter upon you death or when you permanently leave the residence so they will know they have 60 days to respond and 6 months to act. Additional time has been granted but is on a case by case basis. 

 

If a husband and wife, siblings, or friends that live together take out a Reverse Mortgage then it is imperative that all parties be over the age of 62 and be on the Deed and Reverse Mortgage. I can’t tell you how many times a spouse will want to get a Reverse Mortgage and not place their partner on the Deed/Mortgage because they don’t want to share the profit of the residence with their mate. Unfortunately when that spouse passes away and the remaining partner can’t afford the mortgage or doesn’t qualify, the Reverse Mortgage is to blame by the media.  Had both partners been on the mortgage, either one of them could have lived out their natural lives in the home and never had a mortgage payment.

 

In the past, ill-advised or desperate retirement aged homeowners with a younger spouse have taken the younger spouse off the Deed to get a Reverse Mortgage to eliminate large mortgage payments they can no longer afford. When the senior spouse passes the younger spouse may not have the ability to refinance and need to sell. During the housing boom, a family took out a Reverse Mortgages on a property worth $350,000, @ 62% that is $217,000. cash out. Then the value dropped to $175,000. This was during a 2 year period when HUD would not allow the heir to purchase the property for the 5% below appraised value ($166,250.) The heir had to turn the home over to the lender or pay the full amount due. The media had reason to call HUD’s interpretation predatory, because a stranger could buy the home for $166,250 but the heir or spouse needed to pay the $217,000 plus interest. However, during the Media frenzy, AARP sued HUD for changing the rule. The courts said AARP had not standing so AARP dropped the suit. However, HUD backed down and returned to the original Mortgagee Letter that allowed anyone the ability to purchase the home for 5% below appraised value. That rule still stands today.

 

Since Nov 1, 2013, the CFPB and HUD has strongly recommended to lenders that they not allow a married couple get a Reverse Mortgage unless both spouses are on the Deed/Mortgage. This is what happens when the clock swings in the opposite direction. Many lenders won’t allow a married person to get a Reverse Mortgage under any circumstance unless both spouses are on the Deed/Mortgage. I’ve counseled younger spouses that have other arrangements and don’t want the home after they lose their spouse. They would prefer to eliminate the payment sell when their spouse passes and would be satisfied with any equity left. There are still a few lenders that will accommodate.

Many married couples no longer live together. Recently in DC my borrower purchased her home after her separation 15 years ago. The husband was never on the Deed, several lenders turned her away, but we made an exception since he had never been on title and did not live in the property. The estranged husband was required to attend counseling, write letters and sign at closing.  

With an increase in boomers retiring and a decrease in pensions, the Reverse Mortgage is here to stay. We need to understand it so we can make to work to our advantage while coast into the golden years.  

 

Renting Your Home Might Be Best Option

Homeowners have a few options open to them if they are underwater. That means homeowners have a higher mortgage on their home than the appraised value. Two options combined may be your best solution.

Recently, 2.5 million Americans returned to a profitable status leaving only 4.5 million that remain underwater on their home, according to CoreLogic September 2013. Great news unless you are still underwater. The DU Refi-Plus for Fannie Mae-backed loans and the Freddie Mac open access programs are the programs available from lenders like me to lower the mortgage rate even if you owe more than the appraisal value of the property. Even if you have been told you don’t qualify, recent changes to the program may have changed your status.

Homeowners who are underwater but have to move for some reason might be unsure of what they can do. For example, homeowners might have to find a bigger space or have a new job in another location. Homeowners in this situation might believe that the only option to them is to put the home up for a short sale. The problem is that after the short sale the homeowner will need to wait one to four years before they can qualify to purchase a home.

It may be possible to find a reputable tenant and rent the home. This option may lower or even eliminate the debt of the current mortgage payment. The money acquired in rent will change the debt-to-income ratio, probably allowing a new purchase. As a loan officer, I can work with real estate agents or property management companies to assure everything is done to recognized underwriting standards.

The new lower mortgage payment combined with the income of the tenant will make it easier to purchase a new home. While this idea is not new, the way I approach the problem is uncommon. I believe in helping my customers as much as possible. I want to help them move on with their life and possibly create a source of income for them.

FHA Changes Reverse Mortgage Program

The Federal Housing Administration is reducing the risks associated with reverse mortgages, and I am staying abreast of the changes.

In recent years, FHA's Home Equity Conversion Mortgage portfolio has changed in demographics and borrower preferences that added significant risks to the Mutual Mortgage Insurance Fund. These changes included borrowers shifting from selecting adjustable rate mortgages with access to a line of credit or modified tenure/term payment options to selecting fixed-rate mortgages where the borrower draws down all available funds at the time of closing. Younger borrowers with more debt and stagnant home prices also have contributed to the risks.

FHA published two mortgagee letters that note policy changes. They are intended to support financial soundness of HECM program. The agency outlines changes to initial mortgage insurance premiums and principal limit factors, restrictions on the amount of funds senior borrowers may draw down at closing and during the first year following closing, requirements for a financial assessment for all HECM borrowers to ensure they have the capacity and willingness to meet their financial obligations and the terms of their reverse mortgages, and requirements that borrowers set aside a portion of the loan proceeds at closing for the payment of property taxes and insurance.

I am happy to answer questions regarding the FHA changes to the reverse mortgage program. The lender has thoroughly researched the changes and is ready to help its customers understand the HECM program. I will provide customers with expertise on which mortgage product is right for each person.

According to the FHA, an increasing number of tax and hazard insurance defaults by those holding mortgages have heightened the need for a financial assessment of a potential customer’s financial capacity and willingness to comply with mortgage provisions.

Effective Jan. 13, 2014, lenders must complete a financial assessment of all prospective customers prior to approval and closing. The financial assessment also is used to determine under what conditions the prospective borrower meets FHA eligibility criteria.

Visit www.fha.gov for information about reverse mortgages and changes to the program.

Underwater Homeowners Have Options

Homeowners who are underwater on their house can get help. Underwater means that owners owe more on their home than its worth. Currently, 10.8 million Americans remain underwater on their home, according to CoreLogic, a company that provides analyses and statistics for the housing industry. But, they have hope.

Fannie Mae extended its DU Refi Plus Program and Freddie Mac renewed its Freddie Relief program for 2013. Although homeowners might have heard of loan modification programs, these are not that type of help. Loan modification allows homeowners to change their mortgage to reduce their payments while extending the length of their loans. These programs do not extend the length of the loan, but they help homeowners to refinance their loans at the current lower interest rates. Both of these programs fall under the Home Affordability and Stability/Making Home Affordable Plan, which has been successful. Recent upgrades to the program have made it easier to refinance mortgages even those underwater to the historically low interest rates.

Qualified homeowners can refinance a conventional first mortgage, which is backed by Fannie Mae or Freddie Mac no matter how underwater they are. As long as the current Fannie or Freddie loan was acquired prior to May 2009, there should be no loan-to-value limits. Previously, those families who were paying mortgage insurance were not eligible to participate. However, the government has changed that rule. Borrowers with PMI can take part in the program. Homeowners with a second mortgage can participate as long as the second mortgage remains where it is while refinancing the first mortgage.

While some lenders only allow the borrower to refinance up to 105 percent to 115 percent of the property value, my company allows up to 150 percent of the property value. That means if the home’s value has dropped to $300,000 but the mortgage is $445,000, the company still can refinance the home and roll the closing costs into the loan.

My company can offer a Property Inspection Waiver to the borrower on Fannie Mae-backed loans. The company's direct underwriting system acknowledges the property value so the homeowner does not need to pay for the appraisal. I am refinancing many homeowners that are underwater using these programs.

The question for homeowners is whether their mortgage is backed by Fannie Mae or Freddie Mac so they might participate. More than 95 percent of all mortgages are backed by Fannie Mae or Freddie Mac Securities, which means that most homeowners who are underwater would probably be able to participate. It does not matter that the loan was processed through a major financial institution, such as Well Fargo, the security backing is provided by Fannie Mae or Freddie Mac. Also, if homeowners determine their loan is not backed by either institution, that might change if the homeowners check back after a certain amount of time. One of my clients was ineligible for the program in the beginning, but after a few months, the client found out she was eligible.

Homeowners can visit http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx for more information on the programs.

Purchasing a home is possibly one the most important investment decisions of your life. Planning is important. Saving for the down payment and reviewing your credit are essential but there are other things you need to know before you buy a house:

A. PRE-APPROVAL: Take control. Get a pre-approval letter and Select the Mortgage

 

1) CHECK YOUR CREDIT; It is essential that you have a good credit unless you intend to pay cash for the home.  And by good we mean a credit score over 700. A mortgage company will use the middle of your three scores.  Limiting the number of credit pulls to one a year will help increase your score. However, checking your own credit doesn’t affect your score. Pulling your credit report to check for inaccuracies is always a good idea. Your lender should be able to assist you with getting it corrected if you begin before the home buying process.

2) CHECK YOUR FINANCIAL STABILITY;  Have you saved enough for the down payment, escrows and any closing cost not covered by the seller?  A home loan is typically for 30 years, make sure that you will be able to manage the mortgage payment long term. Having a financial reserve of two months payment in liquid assets after the closing is essential. Although nothing is set in stone, job security is of paramount importance.

3) PICK THE RIGHT LENDER; Most buyers don’t realize that the trust and relationship with a knowledgeable lender is paramount to the purchase. The lender will help you to get prequalified.  Advise you and the Realtor, when making the offer, how much seller credit you will need to cover closing cost.  After your contract is accepted, the lender will continue working to ensure your loan is approved and you have the funds to go to the closing table. In today’s marketplace where 50% of all loan applications are denied, going to a big bank where the loan officer has less control may not be your best option.

B. SEARCH FOR A HOME: Work with your real estate agent to search for a home

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4) PICK THE RIGHT REALTOR; Does the Realtor understand your taste and preferences. Are they experts in the areas you want to purchase. Is the Realtor available to show you properties when you aren’t working, on weekends or in the evening? In addition, an experienced agent can provide you with valuable information such as: Pricing trends, Neighborhood conditions, Community services, Schools,  Property tax rates As a buyer, you don’t pay for a real estate sales professional’s services. Instead, the seller of the house typically pays your agent a commission for bringing a buyer to their home. If you’re not already working with a real estate agent, be sure to ask your lender for recommendations. We work with many real estate professionals and can find someone to suit your needs.

C MAKE AN OFFER: Choose the home that’s right for you and make an offer!

 

5) MAKING THE OFFER; A knowledgeable Realtor and the trust you have in them is of paramount importance. In this market we are turning from a buyer’s market to a seller’s market.  There may be multiple offers on the property and even second rounds of offers.  Your Realtor will be able to advise you about increasing the offer or when to walk away so you don’t over pay.  

6) CHECK THE HOME: Most loans need an appraisal but if you are buying a home that doesn’t require it, get an appraisal anyway. A third party unbiased appraisal should protect you from over paying.  Get a home inspection, although most home inspections tend to go overboard and make mountains out of molehills. It doesn’t hurt to know all the minor flaws and it can assist in getting a seller to credit you for the repairs.

Are we in a Housing Recovery ?

Distressed Sales a combination of Short Sales and Foreclosure Sales are declining in the Mid Atlantic area Oct 2012 at 20.7 down from 31.2 Oct 2011

Although that doesn’t mean individual home sales will increase immediately because many home are still underwater.  It does mean that new home sales are up taking the place of those distressed sales. These new home sales will lead to construction jobs and increased appliance sales   This mini rebound has helped Home Depot sales that are up for the sixth straight quarter. Some stores up 4.2%. Are we out the woods? Not really, beware of the SHADOW INVENTORY- an estimated 1.2 million homes are still lurking. But we are seeing a light at the end of the tunnel and this time it isn’t the train.

If you are contemplating  purchasing  your first home in the near future, I suggest you begin working with a loan officer to see if you are pre-qualified or find out what it takes to purchase your first home.

Consumer Financial Protection Bureau; CFPB

The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau, (CFPB), one of the most powerful agencies in US history. Ironically, though Congress created them, they don’t answer to Congress. They answer to the Federal Reserve, or themselves. They are funded by the fines they create, which is a frightening standard, especially for the consumer who ultimately pays the fines.

The CFPB has the authority walk into any financial institution both small and large and regulate, supervise, enforce, fine exorbitant amounts of monies, subpoena and or educate.  A recent visit  to one of the larger lenders for the first time to see if every document in every files adhered to the exacting new standards.  The conservative lender thought they had done an excellent job of compliance due to the regimented oversight and exacting standards given to each of their employees. After a dozen regulators spent 10 weeks in their offices, amazingly they were only fined Two Million ($2,000,000.00) dollars. Hurray the CEO exclaimed, we can stay in business.  With joy and pride he announced to his staff that we would still be in business for another year. Also commenting that those dozen regulators would next go to smaller broker shops without the same resources and they would probably be out of business.

As a loan officer I’m appalled that small to mid-sized business owners will be put out of business by mega fines simply because they won’t have the resources to stay in business.  These fines aren’t necessarily  because any consumers have complained or been wronged. It is because Dodd-Frank has completely changed the way loans have been originated for the past 30 years.   One of the fines was due to an email inadvertently left off of a Good Faith Estimate.  I’ll bet the borrower had the Loan Officers business card and 10 other documents with the email address. That however, was irrelevant to the CFPB.   

The mortgage industry was turned upside down over the past few years and over 50 % of the loan officers working for independent lenders lost their careers because they couldn’t pass the tests. These are human beings that have worked in an industry for 10 to 27 years.  They didn’t have management or loan processing positions which would be a huge asset for many of the questions asked.   Oh yes, I forgot to mention, bank employees don’t need to take or pass the test. While some Loan officers landed jobs at Banks, the 50% figure counts those in bank positions.

But who is really paying for these fines? The consumer of course, lenders play with the fees and margins  daily gaining additional yield spread from consumers to keep big government thriving.  Because only large lenders can afford the fines and fees soon, we no longer have mortgage brokers competing for our business with lower fees and rates.

 If I were to refinance my home with a large bank right now as compared to a local correspondent lender/broker, I would pay a rate .75 pts higher. Neither would I have an independent person willing to meet me at my home after work or on the weekends. Someone I would have unlimited access.  I do want to be protected by another branch of government or approve of a consumer financial protection bureau's lack of oversight by the consitiutionally guaranteed oversight of congress, the supreme court or the president.