Reverse mortgages: How this non-conforming product is gaining popularityJeryl Grahamreverse mortgages, non-conforming, senior citizens, income generators
Reverse mortgages, one of the most popular non-conforming
mortgage products, is experiencing exponential growth. The concept
of a reverse mortgage is not new, but the dramatic increase in the
product's use should make any lender sit up and take notice.
First, a bit of background: A reverse mortgage is a loan against
a home that generates funds for the homeowner. Borrowers are taking
the value of their homes and receiving funds back to them, either
as immediate cash advances, credit lines or monthly cash advances.
It's called a reverse mortgage because, instead of payments from
the homeowner to the lender, it generates payment from the lender
to the homeowner. If the borrower dies, the surviving spouse can
sell the house and repay the loan. He or she will be required to
repay the principle and interest accrued.
There are a few other points you need to know about reverse
mortgages:
*Borrowers must be at least 62 years of age;
*The guidelines are federally regulated through the U.S. Department
of Housing and Urban Development;
*After the reverse mortgage is awarded, the homeowner is still
responsible for paying taxes, upkeep and insurance on a home. A
cash advance to pay these expenses can be worked into the reverse
mortgage product;
*Social Security and Medicare benefits are not affected by a
reverse mortgage, but Medicaid and Supplemental Security Income may
be affected; and
*The IRS doesn't consider the reverse mortgage loan advance to be
income, so it's not taxable.
You can see why this is a particularly important product, as it
offers older adults the opportunity to use the value of their homes
for their immediate needs. In markets like Florida, where property
values have appreciated considerably, reverse mortgages offer
homeowners a good opportunity to take advantage of that without
selling their homes. Many older adults there, and in other parts of
the country, are on fixed incomes that can't keep up with the cost
of maintaining a home and other escalating expenses. It's often the
case that the cost of medical care creates the need for these older
adults to supplement their monthly incomes.
While the need for these products has always been there, I think
they are catching on for two reasons: the sheer number of aging
Baby Boomers and the acceptance of these products by the secondary
market. That new development has renewed lenders' interest in this
product.
Due to these factors, I expect this product to become more
popular over the next 10 years. I also expect it to be a product
that's routinely outsourced to companies like Integrated Loan Services, because
processing this kind of mortgage is very different from traditional
lending. The borrower's income doesn't quality them for the loan;
the value of their home does. So, accurate appraisals become more
critical to the loan process. Instead of creating their own
departments, amending their procedures and purchasing software for
different documentation packages, we expect that lenders will find
it easier to outsource some or all of it.
Another unique challenge to underwriting these mortgages is
pinpointing what's called a "multiplier" and applying it to the
home's appraised value. Reverse mortgage amounts take into
consideration the expected appreciation in the property's worth
over the anticipated life span of the borrower to derive the value.
When you're doing a reverse mortgage, HUD has promulgated standards that
state what can be used as a multiplier to determine an expected
value of a property in the future. This is an underwriting function
that most lenders don't have in-house, and often don't want to add,
thus the need to outsource some or all of the processing of these
products.
There are other differences between reverse and standard
mortgages:
*More people are involved in the loan process. You need to
involve the persons heirs so that all parties are aware of what's
occurring with the home. After all, you are talking about a
family's inheritance. By getting family members involved in the
process, it avoids the perception of any sort of fraud committed
against the elderly homeowner. This means a lot of explaining and
education of the homeowners and their family members. Everyone
needs to be comfortable that this product is in the best interest
of the homeowner.
*This is not an income-driven process. These loans don't fit into
the traditional process used to underwrite traditional homes.
Procedures are usually not in place within an institution to handle
a loan that's not driven by the income of the borrower. *New
documentation. The loan documentation packages for reverse
mortgages are different than most lenders have on hand. With a
reverse mortgage, that documentation spells out the terms of how
the lender is going to pay the borrower rather than how the
borrower is going to pay the lender.
Reverse mortgages will be powerful income generators for lenders
as an aging population begins to tap into the escalating value of
their homes. And, while the underwriting challenges are different
for lenders, I expect their popularity to soar in the next decade.
Lenders who are prepared for this will be the most successful.
Jeryl Graham is senior vice president of Florida operations
for Integrated Loans Services. She can be contacted at (800)
842-8423 or e-mail
[email protected].
