Lenders continue to expand their proprietary reverse mortgage offerings – a timely development FHA sees as encouraging.
“We are considering some other changes [to the HECM program]”. Those are the words of FHA Commissioner Brian Montgomery during a media conference call for the release of FHA’s report to Congress last week. “I don’t think we ever envisioned that the FHA reverse mortgage product would dominate the market, for now, almost 30 years. I know there have been some proprietary products that have grown in the industry.”
It was in fact 32 years ago that Congress passed a bill creating a pilot program of the Home Equity Conversion Mortgage. As it’s said, ‘the rest is history’. That history shows us subdued HECM loan volumes until 2002 when endorsements broke 10,000 units for the first time and then skyrocketed seven short years later to a staggering 114,000+ loans.
Did Congress anticipate that the federally-insured reverse mortgage would consistently represent over 90% of the market? Most likely not. In the last decade, both HUD and FHA officials have expressed their desire for an expansion of the private market and less reliance on FHA. In the years leading up to the housing crash of 2008, there were a handful of popular private reverse mortgage options on the market. While primarily popular with homeowners with values that exceeded FHA’s lending limit they did not significantly shift new applicants with moderate home values away from the HECM program.
Traditionally private or proprietary reverse mortgages have been confined to homes that appraised above the national lending limit. Recently, however, a few select lenders have broadened their product offerings- one to include properties valued as low as $400,000. This could entice potential borrowers who wish to avoid the significant upfront and ongoing costs that come with FHA mortgage insurance premiums.
What would possibly attract more homeowners to a private reverse mortgage solution? Here are just a few existing and potential features that are appealing.
- Broader eligibility for those with home values closer to the national median home price.
- Increased access to the home’s value for properties in areas with historically-rapid home appreciation.
- Simplified underwriting and qualification guidelines.
- Risk-based interest rates or loan pricing based on credit history and average regional appreciation rates.
- The flexibility to include a line of credit along with period lump-sum payouts.
Despite the incredible potential of private reverse mortgage loans the HECM continues to attract the lion’s share of older homeowners. As long as housing market conditions remain ideal expect to see more innovative private products that may move us toward a more diversified market.
Meeting Seniors Financial Challenges
But if they’re hurting for money, none of these dreams will be easily realized. A recent study from Banker’s Life & Casualty found 14 percent of Baby Boomers have no retirement savings, while 55 percent of middle-income Boomers’ retirement accounts have balances under $100,000. The good news: many of these soon-to-be-retirees have significant equity in their homes.
The evolution of the reverse mortgage industry can serve the new Baby Boom seniors, who may be bewildered to suddenly find themselves house rich, yet cash poor.
Here are three key elements of reverse mortgages, then and now:
- 1961: The first reverse mortgage is created by a savings and loan executive as an act of kindness, to help a struggling widow make ends meet;
- 1989: Reverse mortgages become a federally insured program through the Housing and Community Development Act, signed into law by President Reagan;
- 2000: HUD begins requiring third-party reverse mortgage counseling as a consumer safeguard. Shortly thereafter, telephone counseling (in addition to in-person counseling) becomes available.
Today, with reverse mortgage information available through AARP and HUD, and backed by FHA insurance, reverse mortgages are a viable way for qualified seniors to tap their home’s equity to meet living expenses in later years.
Two common concerns you may also want to address at the outset:
- A homeowner can’t “outlive” the life of the loan. As longevity spirals upward, this has become a frequent misperception. There is no reason for a client to fear losing their home with a reverse mortgage, as long as at least one borrower remains on the property, and pays the property taxes and insurance on time.
- The reverse mortgage never has to be repaid by the aging homeowner, unless and until the property owner decides to move or sell, or vacates the home for more than one year.
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During this week of remembrance here are some things to remember that have made the reverse mortgage industry stronger:
- We’re not selling loans, but changing lives
- Our industry has improved consumer education, product choices, and costs
- 4 million plus Baby Boomers will reach retirement age each year
- We are getting traction in the mainstream media
- Investors and the secondary markets support our product
- We will remain as a long-term solution for years to come.