In the beginning of June, Generation Mortgage Company re-introduced its proprietary (i.e. not FHA-insured) reverse mortgage product, geared towards homes too expensive to qualify for HECM reverse mortgages. The news has been getting attention, and while I hate to give Generation (more) free publicity, in this case, the attention is warranted.

Since the collapse of the housing market, all national lenders abandoned their proprietary reverse mortgage product lines because the risks (of home decline and loan default) were suddenly too great to justify offering them. The FHA quickly – though somewhat unwittingly – filled the resulting void with ts HECM reverse mortgage, which has since come to represent more than 95% of new reverse mortgage originations.

In response to soaring losses, however, the FHA has begun to clamp down on lenders (by pressuring them to foreclose when justified) and borrowers (by raising insurance premiums and lowering maximum loan amounts). Thus, it would seem that there is now once again for a competitive proprietary product.

Enter Generation Mortgage Company. Its jumbo proprietary reverse mortgage can be used for homes valued between $500,000 and $6 million. Since the loan is not insured by the FHA, borrowers can expect to pay a higher interest rate to compensate the lender for the added risk. Still, even the FTC concedes that this might be the best option for those with expensive homes: “HECMs generally provide bigger loan advances at a lower total cost compared with proprietary loans. But if you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage.”

It’s hard to say whether this will be the start of a new trend towards proprietary reverse mortgage lending, since for those with moderately priced homes, it seems the FHA HECM is still the most economical choice. However, if other lenders witness strong demand for Generation’s new mortgage and that Generation itself is able to turn a profit, it could lead to a spate of new proprietary reverse mortgage offerings.

When the last remaining borrower dies, the reverse mortgage becomes due, right? Actually, it’s slightly more complicated.

Since most lenders will periodically check on the status of the borrower(s), they will probably learn of the death shortly after it happens. At this point, a letter will me mailed to the primary beneficiary/heir (designated by the borrower and confirmed in the will) apprising one of the situation.

Specifically, you have a few options:

1) Repay the loan in full and keep the property.
2) Sell the property and use the proceeds to repay the loan.
3) Deed the property back to the lender/investor.
4) Abandon the property.

Those who choose to sell the property should be aware that they must receive at least 95% of the appraised value or the full value of the outstanding loan. That rules out the possibility of selling the property to a friend/relative for less than the value of the loan (which is barred by HUD anyway) and simply pass along the loss to the FHA, which presumably insured the reverse mortgage.

If you intend to repay the loan directly and/or sell the property, you should be aware that you technically have 12 months to do so. Unless the property is deeded back to the lender or it has been foreclosed upon, the property officially belongs to the heirs, who retain the right to continue living in the property. As long as they are making a reasonable effort to sell the property or obtain alternative financing to repay the reverse mortgage, the lender will likely grant them a maximum of 4 extensions of three months apiece. During this time, taxes/insurance premiums must continue to be paid, and the loan will continue to accrue interest. If after 12 months no progress has been made or if the heirs violate the terms of the contract in some other way, you can expect the lender to initiate foreclosure proceedings.

Regardless of what happens, you should be aware that you are entitled to any leftover equity in the property if the sale price is greater than the loan balance. On the flip side, a reverse mortgage is a non-recourse loan (and insured by the FHA), which means if it is underwater, the heirs are not liable. If worse comes to worst, you can simply abandon the property and walk away.

I apologize for frightening you with the title of this post, but there’s no way to sugarcoat it; in a desperate attempt to shore up its finances, the FHA – which insures 95% of reverse mortgages – is authorizing reverse mortgage lenders to go ahead and foreclose on properties that warrant it.

The initiative is designed to target borrowers that aren’t paying property taxes and/or hazard insurance premiums, as well as those that aren’t properly maintaining their properties. Given the terms of FHA HECM reverse mortgages, it is only such borrowers who will be affected. That means that the vast majority of borrowers will be unaffected by this push and can rest assured.

It should be noted that not paying property taxes and homeowners insurance premiums has always constituted a violation of the reverse mortgage contract and thus is grounds for foreclosure. In practice, however, the FHA “Didn’t want bad headlines” and didn’t pressure lenders to foreclose.

That was the case when the solvency of the program was a given. Last year, it lost $800 million, and the FHA is struggling to close that gap. The issue is that those who don’t pay their property taxes could ultimately be subject to government tax liens, which would receive repayment priority over the reverse mortgage. With regard to not paying insurance premiums, the concern is that a flood, fire, or other disaster could destroy the collateral (aka the property) for the reverse mortgage. The same risk applies to properties that aren’t adequately maintained.

Apparently, cases of “technical default” or on the rise, due in no small part to the economic recession. In addition, the lack of a built-in escrow account for taxes, insurance premiums (distinct from the HECM insurance), and projected maintenance costs means the onus for monitoring such requisite expenditures is entirely on the borrower.

In short, for those with reverse mortgages understanding, as well as for those contemplating obtaining one, make sure that you honor the terms of your contract. The consequences of not doing so are now serious, and potentially devastating.

According to a recent study conducted by HUD, more than 50% of HECM reverse mortgages are terminated within 6 years of their origination. For older borrowers, the average is closer to 5 years. That’s pretty incredible when you consider that even the reverse mortgage industry recommends that borrowers should plan to remain in their homes for at least 8 more years before a reverse mortgage becomes economical.
First of all, let’s examine why that’s the case. In a nutshell, the origination fees, closing costs, service fee set-aside, and upfront insurance premium can consume 10% of the loan, before any funds have even been distributed to the borrower. If you allocate all of those fees over a long enough time period, they become infinitesimal on an annual basis. If, however, you terminate the loan within a few years, you are effectively paying 2-3% annually, on top of the 5% interest that you are also being charged. If you don’t think that adds up, take a look at the chart below (courtesy of the HUD report) which shows how reverse mortgages erode home equity (via the proportion of debt to equity).
HECM Debt and Equity by Age of Loan in Years
Back to the subject at hand, it’s unclear as to why such a large portion of reverse mortgages are terminated relatively soon after they are obtained. Regardless, it’s important that when you obtain a reverse mortgage, you make a reasonable estimate of the number of years that you intend to remain in your home (during which the loan will presumably remain outstanding). Think of this as a form of budgeting; based on your estimate (and the chart above, which can theoretically be personalized by your reverse mortgage counselor/lender), you will be able to see how much cash you will have left over after the loan is repaid and you move out of your property. (Bear in mind that the chart also builds in home-price appreciation, and without such appreciation, your equity will be eroded at an even faster rate).
In theory, it’s possible to beat the system if you remain in your home until your death. In practice, though, it’s likely that you will be forced to vacate your residence prematurely (due to health reasons), or will voluntarily choose to move in order to be closer to friends, take advantage of more suitable climate, and.or downsize into a smaller house. In this case, you should consider the potential impact on your equity position and budget accordingly, before obtaining the reverse mortgage.
HECM Survival Rates - Termination Number of Years
Reverse mortgage borrowers might be surprised to learn that a reverse mortgage can be refinanced. Due to its unique structure, however, the calculus and considerations involved are different from those associated with refinancing a conventional mortgage.
The primary goal of refinancing a reverse mortgage is usually not to save money on interest. While interest rates may have fallen since you initially obtained the reverse mortgage, the decline probably won’t be enough to offset paying $10,000 in refinancing fees. In addition, since reverse mortgages don’t usually have limited terms (they are due when the borrowers moves or passes away), this is also not a consideration in refinancing, unlike with a conventional mortgage. However, you might refinance to switch from a fixed-rate product to a variable-rate loan.
Most reverse mortgages are refinanced in order to obtain more funds, and increase the size of the loan. For example, simply by virtue of having aged, you are automatically entitled to withdraw a greater chunk of home equity. In addition, there is also the possibility (though perhaps not under current circumstances) that your home has appreciated in value and/or the FHA has revised its loan maximums for your region, both of which would entitle you to more cash.
Most experts advise that the refinancing should produce additional funds totalling 2-4 times the fees, in order to be worthwhile. For example, if you are eligible to obtain an additional $45,000, and origination fees total $10,000, a refinancing could be justifiable. On the other hand, if your home has only appreciated slightly in the interim, a refinancing probably wouldn’t be economical. In addition, if your goal is merely to alter the method by which funds are distributed (from line of credit to monthly payment, for example), you can do so without refinancing. Instead, your lender might charge you a modest fee for the change.
With a refinancing, you don’t need to pay another up-front FHA insurance premium. You will only be assessed the premium on the increase in the balance of the loan. Another FHA rule is that you won’t be required to undergo a fresh counseling session if you the new funds you receive exceed five times the value of any new origination fees.
Ultimately, the most important consideration in refinancing (as with initially obtaining a reverse mortgage) is your motivation. Do you really need the additional funds, or are you merely trying to cash out some additional home equity so that you can maintain your standard of living? This is a serious question, and one you should not take lightly, regardless of how you are advised by your lender.

I’ve seen dozens of solicitations and information sheets that contain a full litany of situations in which reverse mortgages are suitable for potential borrowers. What I have yet to see, however, is a comparable list of situations in which reverse mortgages are definitely not appropriate. Here goes:

  1. Short-term Time Horizon: Due to high upfront costs (origination fees, insurance premium, etc.), a reverse mortgage is simply not economical over a short time horizon. In order for it to be worthwhile, you should plan on staying in your property for a minimum of 7 years. If your time horizon is shorter, you should consider an alternative source of financing.
  2. Strong Financial Position: If your financial position is currently strong, there’s no reason to obtain a reverse mortgage, since you will pay annual fees, interest, and insurance premiums for as long as the loan is outstanding. Instead, wait until your cash position deteriorates (ideally, this will never happen), and/or you have a legitimate financial need before contemplating a reverse mortgage.
  3. Young Age: If you are barely older than 62 (the age at which one becomes eligible for a reverse mortgage), you might want to consider waiting a few years before obtaining a reverse mortgage. I offer this suggestion not only because FHA loan maximums are correlated with age, but also because the longer your loan remains outstanding (the more interest it will accumulate). Therefore, by waiting, you can both obtain a larger loan and save money (on interest) over the life of the loan.
  4. Desire to Live Affluently: If your primary motivation for obtaining a reverse mortgage is to raise your standard of living, please reconsider. While trading home equity for a nice vacation, new car, and a few fancy meals might seem like a good idea, you will almost certainly regret your decision when the time comes that you have a genuine need for some extra money.
  5. Property Needs Repairs: If your property is in poor condition, you need to bear in mind that under the terms of the reverse mortgage, it is your responsibility to fix it. Failure to do so could lead to foreclosure. If only minor repairs are necessary, however, you can use the proceeds from an HECM reverse mortgage or better yet, a single-purpose reverse mortgage, to finance the repairs.
  6. Desire to Will Property to Heirs: If you have any desire to will your home to your heirs, a reverse mortgage is not appropriate, because when the loan comes due, the property will be sold. While your heirs still have the option of repaying the loan with cash at that time, a better choice would be for your heirs to purchase the home from you now or lend you money directly, so that there is no uncertainty when you pass away and/or the hypothetical reverse mortgage comes due.
  7. Poor Health: If your health is (excessively) poor, a reverse mortgage probably isn’t a good idea. Consider that even if you use the proceeds for legitimate medical expenses and your health worsens, you will be back where you started. Unless you need cash to pay for a one-time (i.e. not chronic) medical outlay, you should consider borrowing money from family members and/or selling your home.
  8. Lack of Savvy: Finally, if you don’t understand how a reverse mortgage works, do yourself a favor and take the steps to understand it, instead of diving right in. You might discover something that you don’t like that convinces you to reconsider. Then again, you might discover that in fact, it is suitable for you. The point is clear: educate yourself before making such a big decision.
Reverse Mortgage No-Nos

In previous posts, I have explored the decision to obtain a reverse mortgage, and the process that is necessary to produce such a decision. With today’s post, I want to explore a different process- that of actually obtaining a reverse mortgage.

1. Once you’ve decided that a reverse mortgage is right for you, the first step is to confirm that you are indeed eligible to obtain one. You can refer to our handy flow-chart in order to make sure that you meet all of the requirements. If there is any uncertainty, you can skip ahead to step two/three, and ask your prospective lender to confirm your eligibility.

2. The next step is to select the type of reverse mortgage that you wish to obtain. While for many, an HECM reverse mortgage is the obvious choice, it also makes sense to examine single-purpose and proprietary reverse mortgages, as they may offer better terms. I explained the difference in a previous post.

3. Depending on which type you’ve selected, you will then need to identify a handful of suitable lenders and establish contact with them. You can find a list of single-purpose reverse mortgage lenders here. If you’re looking for an HECM lender, I would recommend browsing the National Reverse Mortgage Lenders Association (NRMLA) lender listings. You are advised to avoid responding to solicitations and to avoid working with intermediaries (brokers, estate planners, etc.), who will simply steer you to favored lenders and take a commission for doing so.

4. Obtain quotes from each of the lenders, including the interest rate, origination fees, and insurance costs. Some lenders have started to waive certain fees, and you might be surprised by how much they now differ. In such cases, make sure that there are no strings attached, and try also to understand how, if it all, mortgage terms vary between lenders.

5. On the basis of the quote and face-to-face meetings, you should select a lender and begin the application process. At this point, you will have to decide how you want to accept distribution of the proceeds, whether as a lump-sum, monthly (term/tenure) payment, and/or line of credit.

6. At this point, the lender will begin to process your application and appraise your home. Aside from your age, this appraisal is the biggest variable in determining the size of the reverse mortgage for which you are eligible. Remember: you don’t need to take all of these funds. You can choose the size of your mortgage, as long as it falls within the limits set by the FHA.

7. Before the loan can close, you will need to complete a counseling session with a HUD-approved organization, and present the certificate from the session to your lender.

8. After the lender signs off on the paperwork, the loan is closed. From this point, you have three days to review your decision, and if you’re not satisfied, you have the right to a penalty-free cancellation. If you choose not to exercise this right, the funds will be distributed to you in the manner that you specified, and the reverse mortgage will begin accruing interest.

Eligible homeowners that are determined to withdraw the equity from their homes have two general options: reverse mortgage and home equity loan. In this post, I’d like to briefly explore the advantages and disadvantages of each and try determine which choice is better.

Technically a reverse mortgage is a type of home equity loan, but with one important difference. While a conventional home equity loan must be repaid in periodic (monthly) installments, the interest/principal on a reverse mortgage loan is only due when the loan matures. Therein lies the main advantage (and pitfall) of a reverse mortgage loan, from the perspective of (potential) borrowers. Let’s put this aside for a moment, however, and look at the other differences.

From a cost standpoint, a home equity loan (as well as a cash-out refinancing, for that matter) will almost always be less expensive than a reverse mortgage. The origination fees for the two products are comparable, but reverse mortgages require upfront and annual insurances premiums. In addition, since a reverse mortgage is negatively-amortizing, total interest paid over the life of the reverse mortgage will always be greater than interest paid on a comparably-sized home equity loan.

Failure to repay a home equity loan in accordance with the terms of the loan agreement will almost certainly lead to foreclosure, while a reverse mortgage doesn’t need to be repaid until the borrower passes away or moves out of the home. Although, taxes and homeowners insurance must continue to be paid, and the property must be maintained by the borrower for as long as the loan is outstanding.

In short, for homeowners that currently have no existing mortgage debt and whose cash need is moderate and short-term, a home equity loan is probably the better choice. It will be less expensive to the borrower and will leave the borrower with his home equity intact after the mortgage is repaid. For homeowners with existing mortgage debt and whose cash needs are large/indeterminate, a reverse mortgage is a more realistic option. It basically eliminates the possibility of foreclosure and fixes it so that you don’t need to continue making payments on your primary mortgage. Just be advised that when the reverse mortgage comes due, you might not have much equity left in your home.