BLOG VIEW: As the U.S. economy continues to heal from the effects of the Great Recession, consumers are turning their focus back to retirement in the hopes of living in comfort as they enter their golden years.
For reverse mortgage bankers, therein lies the trillion-dollar opportunity. Since sub-prime loans are a thing of the past, there remains a need for easy qualifying mortgages to help a large segment of our aging population. The answer for consumers and mortgage bankers is the Home Mortgage Equity Conversion Loan, or HECM.
In short, this is what is referred to as a reverse mortgage. Most consumers are familiar with reverse mortgages, thanks to TV commercials featuring pitchmen like Henry ‘the Fonze’ Winkler, who reminds us of the ‘Happy Days’ for retirees, while Fred Thompson brings a little ‘Law and Order’ to the conversation.
To help seniors feel even more comfortable, there's the occasional commercial giving a ‘Hart to Hart’ message from Robert Wagner and one that features Barbara Eden of ‘I Dream of Jeanie’ fame.
To better illustrate the potential for this market, consider this: In the U.S., more than 10,000 baby boomers turn 65 each day. It is estimated that 48% of these soon-to-be retirees do not have the savings needed to cover their basic living expenses for their golden years.
Although 60% of these retirees have less than $100,000 in savings, a good number of them are homeowners. Therein lies the opportunity.
You see, it's unlikely anyone has to convince these Americans to borrow money. When TV icons are telling them a product is safe, they tend to believe it. Here is the basic message ‘the Fonze’ and friends are sending:
A HECM loan allows homeowners of age 62 or older to take out a reverse mortgage that permits them to withdraw a lump sum, periodic payments, or a combination of both. This type of loan can work very well for many seniors.
The devil, of course, is in the details. According to the Federal Housing Administration (FHA), a HECM loan requires consumers to pay closing costs, interest, a servicing fee and mortgage insurance premiums. A detail often overlooked or not properly explained to the borrower is that they are still responsible for paying property taxes, insurance and homeowners association (HOA) assessments.
In my opinion, the biggest upside of reverse mortgages is that they are easy to qualify for.
At one time, applying for a HECM was not too dissimilar from the old sub-prime days.Â
There were, however, some early concerns with these products – one of which was that HECMs would adversely impact the amount a consumer could receive in social security income awards. The truth is, HECM funds are not considered income, so they aren't taxable and can't impact supplemental security income or benefits under Medicare in any way.
Another early issue was the after-death aspect of calling the HECM due and payable. The truth is, a HECM is considered a non-recourse loan, which means that the borrower's heirs will never be responsible for paying more than the home's value, even if the property ends up being upside-down due to market flux.
Though HECMs can be a great way for a retiree to generate cash, these loans carry a high level of risk for lenders. Lenders must be cognizant of the fact that every HECM loan will most likely not be paid off for decades, and the loan accumulates interest during that time. If anything, Lehman taught us that in a moment's notice, any neighborhood can become a declining market. Due to the mechanics of a HECM, this can be a recipe for disaster.
This caught the attention of some of the big financial players. What really caught their attention was that in 2013, the FHA received $1.7 billion in taxpayer bailout, much of which was due to losses attributed to its HECM loan program. Due to the number of potential servicing and collection hazards, as well as projected defaults, Bank of America and Wells Fargo opted to withdraw from the reverse mortgage market in 2012.Â
Fortunately, the U.S. remains the personification of capitalism, and the reverse mortgage market has become a prime opportunity for independent mortgage bankers. Ocwen Financial Group estimates the HECM market could potentially be a $1.9 trillion market, so there is a great deal of growth potential in this industry.
Similarly, Denmar Dixon, chief investment officer of Walter Investment Management Co., says the reverse mortgage market is ‘huge’ and ‘under-penetrated.’
Needless to say, HECMs have become more popular in recent years, so much so that there were $15.3 billion in HECM loans in 2013 – an increase of 20% over the previous year. This trend is set to continue this year.
As a result, industry and government regulators are dealing with a potential nightmare: a growing number of loan defaults that could lead to foreclosures, and even evictions of elderly homeowners.
Nonperforming loans represent a small share of the overall HECM portfolio, but delinquency numbers are growing quickly. An industry concern is that borrowers may not be fully aware of their obligations. True, they aren't required to make monthly mortgage payments, but they can end up with a loan in default if they fall behind on their property taxes or insurance payments. The state of nonperforming loans has raised concerns about the prospect of seniors losing their homes and also about the risk of losses for the FHA's mutual mortgage insurance fund.
Recently, the Consumer Financial Protection Bureau (CFPB) issued a bulletin stating that ‘many older consumers and their families are confused and frustrated by the terms and conditions of reverse mortgages.’ Since it began accepting complaints in December 2011, the CFPB says it has received more than 1,200 complaints about reverse mortgage loans.Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
Conversely, servicers share in the concern and misconception that borrowers have little responsibilities, seeing as a borrower doesn't have to make monthly payments. There is the assumption that the servicer will pay the property taxes, hazard insurance and/or HOA assessments. This misunderstanding has been a source for far too many foreclosure complaints related to HECM loans.
Another area that raises an eyebrow is the fact that a HECM becomes due and payable upon the death of the borrower(s) or if the borrower(s) permanently moves from the home. On the flip side, a payment deferral period may be available to some non-borrowing spouses following the borrowing spouse's death.
That said, the CFPB reports that too many complaints are related to borrower confusion about the terms of their loans, especially as it relates to denials for changing those terms.
The CFPB categorized the complaints it has received as follows:
- Problems when unable to pay (loan modifications, collection, foreclosure);
- Making payments (loan servicing, payments, escrow accounts);
- Applying for the loan;
- Signing the agreement; and
- Receiving a credit offer.
The CFPB says the most common complaint comes from both consumers and their adult children involved in adding additional borrowers to the loan in order to extend its term or allowing children to assume the loan for an aging or deceased parent. Often, these complaints come about after the death of a borrower when non-borrowing family members living in the home who have represented they were not aware that the loan became due and payable until the lender or servicer notified them. The CFPB says borrowers frequently fail to understand that HECM loans are based on actuarial tables, so adult children may retain the home only by paying off the loan or paying 95% of its appraised value.
Because the percentage of equity that can be withdrawn is based on age (i.e., life expectancy), couples frequently borrow only in the name of the older spouse to increase the amount they can borrow. To simplify it, the older the qualified borrower is, the higher the percentage of the appraised value will be approved (or higher loan to value, as it's known in the lending industry).
With this in mind, some borrowers have stated their loan originator falsely assured them they would be able to add the other spouse to the loan at a later date. The CFPB reports that a recent FHA change to HECM appears to have eliminated this problem for loans originated after Aug. 4, 2014, by incentivizing the inclusion of both spouses as borrowers. This may sound familiar; borrowers complain that they were either unaware of their responsibility or unable to pay property taxes and homeowners insurance, triggering defaults.
The CFPB further describes borrowers have expressed unsuccessful attempts to halt foreclosure proceedings by paying past-due taxes or arranging payment plans. Other consumers complain that loan servicers have incorrectly determined that their property taxes were delinquent.
Borrowers considering HECM loans or other reverse mortgage loans should know that these mortgages have strict requirements concerning owner occupancy. The bottom line is that a HECM loan can become due and payable when the borrower no longer occupies the property as his or her principle residence.
Borrowers also claim they have been unable to change the interest rate on their loan and feel they are being overcharged or that the rate on their variable rate loan has increased too rapidly. That, too, is a big concern, as it has been argued that higher rate loans targeted to seniors is a form of equity stripping.
As a result of some of these issues, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2015-02 on Jan. 9 to assist lenders, servicers and, ultimately, the consumer to better understand borrower responsibilities.
To qualify for a HECM loan, a borrower must meet the following criteria:
- Be 62-years of age or older;
- Own the property outright or paid down a considerable amount;
- Occupy the property as the principal residence;
- Not be delinquent on any federal debt;
- Have financial resources to continue to make timely payment of ongoing property charges, such as property taxes, insurance and HOA fees, etc.; and
- Participate in a consumer information session given by a HUD-approved HECM counselor.
In addition, the property must meet the following requirements:
- Must be a single-family home; or
- Two- to four-unit building with one unit occupied by the borrower;
- HUD-approved condominium project; or
- Manufactured home that meets FHA requirements.
In addition, there are financial requirements in order to qualify. The borrower's income, assets, monthly living expenses and credit history must be verified.
What's more, timely payment of real estate taxes and hazard and flood insurance premiums, is now verified, as well.
There have been modifications over the years as to the loan amounts a person can qualify for. Currently, the loan amount is based on the age of the youngest borrower or non-borrowing spouse, current interest rate, lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price, and initial mortgage insurance premium.
Oh, and let's not forget that mortgage fraud against seniors is on the rise. That's a story for another day.
The one thing everyone agrees on is that borrowers need to make sure the appraisal is solid when considering a reverse mortgage. An inflated value could adversely impact the borrower's estate, heirs or non-borrowing spouse. In short, borrowers should make sure the appraisal is coming from a reliable AMC.
For now, HECMs appear to be the new shiny toy everyone 62 or over must have. A reverse mortgage can be a definite godsend if consumers know what they're getting into.
Conventional wisdom tells us borrowers need to make sure they read the directions for that shiny new toy before they open the box.
Jimmy Alvarez is director of risk management for Financial Asset Services Inc., a national asset management company specializing in providing asset management, property disposition and valuation services to mortgage companies and financial institutions.
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