The last article we wrote about reverse mortgage pros and cons was in February of 2009. Since then, there have been a lot of changes, both good and bad, that we feel need to be addressed. 2010 was the year of regulation of the mortgage industry coupled by falling home prices. Now we’re half way through 2011 and have added additional regulations to the mountain of legislation created in 2010, let’s delve into which of the regulations have provided a benefit to borrowers and which have proven to be a hindrance.
Let’s address the pros first:
Wide range of available rates
As I write this article, interest rates on the HECM fixed standard product are ranging from 4.0% – 5.75%. This gives borrowers the ability to choose a rate that best fits their needs. For example, someone who is concerned mainly with the increasing loan balance over time would more than likely choose a rate of 4.0% and pay a higher origination fee. The result is higher costs at closing, but a slower growing loan balance over time.
Reverse mortgages have always been expensive. Granted with the strong secondary market, brokers have been able to cover a lot of costs for their borrowers. Now there’s a new option. In October of 2010, HUD released the HECM Saver. This program dramatically reduces the upfront cost of reverse mortgages, which is why it’s the biggest reverse mortgage pro to come out of 2010.
The HECM Saver is for borrowers who do not require as much money at closing and were turned off by the high closing costs of the Traditional HECM. HUD’s upfront mortgage insurance on a traditional reverse is 2% of the appraised value or HUD’s lending limit ($625,500), which can equate to as much as $12,510. The HECM Saver only charges 0.1%, which means the maximum is $62.55. This is perfect for borrowers who wanted to leave their money in a line of credit or didn’t want all the funds. It is available in both adjustable and fixed rates.
Higher Loan Proceeds
HUD also lowered the interest rate floor, which is one factor in determining the amount of money available under the program. The new floor is at 5.0% and with most lenders offering rates at 4.0% – 5.06%. that’s a pro for borrowers looking to get additional monies from their reverse mortgage. Since the floor is at 5.0%, the amount of benefit will be the same with any rate from 5.06 and lower.
$625,500 Limit Extended for 2011
In 2009, Congress passed the American Recovery and Reinvestment Act. One of the provisions is that it increased the HUD lending limit on reverse mortgages from $417,000, set by the Housing and Economic Recovery Act of 2008, to $625,500. Congress recently voted to extend the temporary increase through 2011. This is a big pro for those will higher home values.
New Counseling Protocol
HUD has made changes to the required counseling protocol that overall is a positive change. Counseling is required as a safeguard for those obtaining a reverse mortgage do to the complex nature of this financial instrument. The idea is to make certain that borrowers completely understand the nuances of reverse loans. The new protocol tests the borrowers knowledge of the product and digs in a little deeper to their personal finances, and delves in further to reverse mortgage alternatives.
Now let’s explore the cons:
The current changes to Regulation Z completely impact the way we do business with fixed rate reverse mortgages. The adjustable rate product isn’t affected by the change since it’s open ended credit. So, what’s negative about the change? The main reason is it makes it difficult for us to negotiate with borrowers in regards to the origination fee. We can no longer give a special deal to one borrower and not offer it to all borrowers. This really hurts those who are short funds to close. In the past, we have closed reverse mortgages with next to zero origination fees in order to help someone who really needed it. Now we can’t offer that anymore.
Falling home values / increased foreclosure rates
A major con for the reverse mortgage industry in 2011 is the fact that many housing markets have not recovered from the mortgage melt down. Nationwide foreclosures are still high, which directly affects market values and as we all know, the amount of money available from a reverse mortgage is based on the value of the home, the borrowers age and the expected interest rate. As home values decline, borrowers are limited in the amount of money they can borrow.
This con does not affect those homeowners who have already taken out a reverse mortgage. Reverse mortgages are not affected the same way that Home Equity Lines of Credit (HELOC) have been affected. What I mean is that once a line of credit is established with a reverse mortgage, the amount is guaranteed, even if home values decline. Borrowers must still live in their home.
Appraiser Independence (AMC’s)
Fannie Mae (FNMA) and Freddie Mac (FHLMC) enacted the Home Valuation Code of Conduct (HVCC) in May of 2009 as a result of New York Attorney General, Andrew Cuomo. The idea of HVCC is to remove the broker from contact with the appraiser. The goal is to provide for appraisals without influence on value from the originator. FHA followed suit and named it Appraiser Independence.
This sounds like a great idea, and in theory it is. The con comes into play when we examine how most Appraisal Management Companies (AMC) pay appraisers. Brokers order their appraisal through an AMC who then assigns the appraisal order to an appraiser. There currently is no regulation on the AMC when it comes to paying appraisers. So, often times, appraisers will be paid half (or even less) of what they would typically earn. As such, the quality of the appraisal is directly affected. In addition, many reverse mortgage appraisers are refusing to take the assignment due to the decrease in income. Often times appraisers will bid for jobs, so the lowest bid wins. For example, if an appraiser bids $100 that’s all he/she will receive from an appraisal where the borrower pays $450. The result is that inexperienced appraisers and appraisers from out of town often earn the jobs. By the way, the AMC keeps the difference for doing nothing more than hiring an appraiser on behalf of the broker.
Reverse mortgage appraisal values are often coming in low and there’s little that brokers can do to refute. Brokers are allowed to send a rebuttal to the AMC, who will then forward the information to the appraiser. More often than not the rebuttal is denied.
New Monthly Insurance Factor
A reverse con is that the new monthly Mortgage Insurance (MI)is now 1.25%. Before October of 2010, it was 0.50%. That’s a huge increase. The impact is seen over time when looking at the amortization schedule since the monthly MI is added to the balance.
All in all, 2010 and the first half of 2011 has turned out to be a very positive period for reverse mortgages, especially in the area of decreasing reverse mortgage closing costs. So, now is the time for you to explore your low cost reverse mortgage!