By Mark Miller
Tribune Media Services
The reverse mortgage market has been shrinking steadily over the past few years, but a new lower-cost version of these loans for seniors is starting to get some traction in the market.
Reverse mortgages are available only to homeowners over age 62. They let seniors who need cash tap their home equity while staying in their homes. The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is regulated and insured by the U.S. Department of Housing and Urban Development (HUD).
New HECM loan activity was down 37 percent in 2010 from the peak year of 2008, and 2011 will be another down year, according to John K. Lunde, president of Reverse Market Insight, which tracks industry data.
The steep drop in 2010 brought the industry down to a total of 72,638 new loans. That decline, Lunde says, resulted mainly from a decision by HUD to reduce the percent of a home’s value that could be accessed through a reverse loan – the principal limit – by 10 percent. The change reflected caution by HUD, which insures HECM loans, in the wake of the housing crash.
HECMs often are criticized for their high fees. Although lenders often cut these charges to win business, by law they can include an origination fee of two percent of the first $200,000 of a home’s value, plus one percent on the additional value (these fees together can’t exceed $6,000). There’s also an upfront mortgage insurance premium, or MIP, of 2 percent of the home’s appraised value, and an ongoing annual MIP equal to 1.25 percent of the mortgage balance. Finally, there are servicing fees, closing costs and other incidental fees.
For example, a 72-year-old borrower with a home appraised at $400,000 could have access to $270,800 under terms of the standard HECM as an initial principal limit – a formula that takes into account the percentage of the home’s value based on the borrower’s age and the interest rate. In most states, the maximum origination, MIP fees, and other closing costs allowable under HUD regulations on the loan would total a whopping $16,814, according to an analysis provided by the National Reverse Mortgage Lenders Association (NRMLA).
But a new lower-cost option was introduced last year, and it appears to be gaining ground. Called a Home Equity Conversion Mortgage (HECM) Saver, the new loan is administered by the U.S. Department of Housing and Urban Development just like a standard HECM. But the amount that can be borrowed is smaller and it also has far lower costs: an upfront premium of only 0.01 percent of the property’s value, or HUD’s loan limit, whichever is less, vs. the standard loan’s two percent.
Saver HECM originations have more than tripled this year, from 2.6 percent of new loans in January to 9.2 percent in August, according to Reverse Market Insight. “I’d be pretty surprised if this didn’t keep increasing,” says Lunde.
Most Saver HECMs are being issued as adjustable rate lines of credit, with borrowers using them to meet unforeseen expenses. In this sense, they’re more like a home equity line of credit (HELOC).
How do HELOCs and Saver HECMs compare? Pricing and interest rates are similar, but there are some important differences.
Retirees often have difficulty qualifying for a HELOC, since they may not have sufficient income to meet lender requirements. And unlike a HECM, the HELOC requires ongoing monthly payments from the borrower. Also, banks can freeze, reduce, or revoke a home equity line if your equity falls too low-and that’s just what happened to many borrowers after the housing bubble burst and home values plummeted.
Metlife Bank, which is the industry’s largest lender says 85 percent of the reverse loans it issues are now Saver HECMs with adjustable rates.
In fact, the reverse market may be dividing into two groups: financially-pressed seniors who need standard HECMs for their higher loan amounts and lump sum payments, and more affluent seniors using saver HECMs for forward financial planning purposes.
”The Saver client needs less money,” says Peter Bell, president of the NRMLA. “They’re using it as a standby reserve.”
Learn more: I report further on Saver HECM loans in a story for the new November issue of AARP Magazine explaining a variety of ways to tap your home for cash-everything from reverse loans to downsizing, home sharing or doing a sale/leaseback with family members.
Mark Miller is the author of “The Hard Times Guide to Retirement Security.” He publishes http://retirementrevised.com, recently named the best retirement planning site on the web by Money Magazine. Contact him with questions and comments at mark@retirementrevised.com
