By Frank Melia, Business Development Manager, Quontic Bank
It’s hard to recall a more beleaguered financial product than the reverse mortgage.
Battered by media reports of seniors losing their homes, at least in part because of abusive lender practices, reverse mortgages acquired a severely tainted reputation, not only in the public realm but even among many real estate and financial professionals.
As a result, originations of reverse mortgages (RMs) tumbled from their peak of nearly 115,000 in 2009 to less than 52,000 five years later, according to the National Reverse Mortgage Lenders Association.
But that same year, 2014, witnessed the imposition of major regulatory changes that have radically transformed the reverse mortgage from the potentially risky loan that it was – sometimes for lenders as well as borrowers – into a vastly more stable option that better fulfills its original mission: to provide dependable income, liquidity or funds for debt consolidation for senior homeowners.
Trust attorneys and CPAs are keenly aware of this fact, and increasingly are using RMs in their clients’ behalf.
That is a highly significant development, because one of the widespread misconceptions about reverse mortgages is that they are mainly for retirees with no financial resources other than the equity in their homes.
The fact is, RMs can provide flexibility as a financial planning tool and a means of reducing income taxes for seniors in a wide range of wealth categories.
But the public at large, and even a large portion of the mortgage brokerage community, remains unaware of the RM’s vast transformation.
How have RMs changed? In 2013, recognizing the problems besetting FHA-insured reverse mortgages (known technically as home equity conversion mortgages or HECMs), Congress passed the Reverse Mortgage Stabilization Act, which authorized HUD to make far-reaching changes in the way RMs were structured. The following year, HUD began enacting sweeping rules, chief among which did the following:
To avoid foreclosures due to property tax default, casualty losses, and long-term deterioration of property, borrowers must be evaluated for their ability to pay property taxes and homeowners’ insurance, and keep up maintenance. Lenders must withhold funds for that purpose when appropriate.
To help ensure financial stability, borrowers are limited in how much of their credit line they can use in the early stages of the mortgage term.
Using established criteria, lenders must allow non-borrowing spouses of RM borrowers to remain in the home following the mortgagor’s death.
Borrowers have been given an expanded range of options to retain their homes if they do miss property tax or insurance payments.
Prohibitions against misleading advertising or promotion have been strengthened.
Prospective reverse mortgage borrowers are required to attend reverse mortgage counseling from a HUD approved counselor prior to signing a reverse mortgage application. The counselor must gain familiarity with the client’s financial situation and goals, and educate the client about the features of reverse mortgages and other financial options that might meet the client’s needs.
According to a study published last year by the Center for Retirement Research at Boston College, the rules changes are projected to reduce the default rate on RMs by 50 percent. And even more safeguards are in the works.
Steven Schnall, Quontic Bank’s CEO, notes that more protections for senior citizens are likely soon.
The FHA has proposed such measures as a cap on lifetime interest rate increases on adjustable-rate RMs, a reduction in the cap on annual rate increases, a requirement that lenders pay any mortgage insurance premiums beyond the mortgage contract termination, if necessary; and creation of a “cash for keys” program to avoid lengthy foreclosure procedures. As noted above, reverse mortgages can have many purposes. For example, retirees who need to supplement their social security payments by drawing from IRAs or other tax-deferred savings plans may be hit with substantial tax bills. But there is no income tax on funds drawn from a reverse mortgage, and the tax-deferred savings can continue to grow undisturbed.
Trust and estate planning CPAs are using RMs in a variety of applications. At Quontic Bank, we find that about a third of the reverse mortgages we originate are now for inclusion in trusts, and the percentage is growing.
Also, retirees can utilize reverse mortgages for the purchase of a new home. This is proving to be a valuable option for those who have significant equity for a down payment, but limited income for monthly debt service.
In addition, the declining prospects for defaults have bolstered the secondary market for RMs. In the first nine months of 2016, a record $7.7 billion of securities collateralized by reverse mortgage pools were issued, up from $6.5 billion the same period of 2015. The securities were underwritten by such financial giants as Citicorp, Nomura, and Bank of America Merrill Lynch. The total volume of securities backed by reverse mortgages total about $55 billion as November 30th.
In other words, the reverse mortgage – now much safer and greatly improved – is beginning to shed its unseemly reputation and take its place as a legitimate financial tool for senior homeowners.
Mortgage and residential property brokers should take note and participate in its slow but steady resurgence in home finance for the growing senior population.