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].