Fueling your business, overcoming obstacles: Current challenges in originating reverse mortgagesGary Zimmermannreverse mortgages, educating seniors, HECM, HUD, Housing and Economic Recovery Act of 2008
With today's gas prices, we're all feeling a financial crunch.
Yet, from car pooling to public transportation to working from
home, people are finding ways to cruise on while overcoming the
expense. The mortgage industry is no different. While we have the
excellent reverse mortgage product available to help seniors and
fuel our business, we also have many challenges to conquer. With
new legislation coming into place, and mortgage professionals
acting as good ambassadors of the reverse mortgage product, the
industry will continue to grow.
Educating seniors on the reverse mortgage
product
The primary road block that we encounter in originating reverse
mortgages is educating the customer. Many seniors are under the
impression that, eventually, their home will be taken away if they
obtain a reverse mortgage. In the early years of reverse mortgages
(the late '80s), there were provisions in the paperwork for the
lenders to charge a portion of the equity at the time the last
survivor was no longer in the home. However, the U.S. Department of
Housing and Urban Development (HUD) came into the market years ago
with the Home Equity Conversion Mortgage (HECM)currently the most
popular programand set specific parameters so that this is no
longer an issue. Its important to educate seniors on this fact, as
well as other specifics, to disprove any additional false
information they may believe. Further, patiently explaining the
financial options will give seniors peace of mind in working with
the mortgage professional. General exposure to the public about a
reverse mortgage is greatly beneficial for the industry.
Managing costs to close reverse mortgages
Another reason why people step on the brakes when it comes to
originating reverse mortgages is the cost to closethe reverse
mortgage program is perhaps the most costly program many will ever
apply for. With the closing costs being equal to a little more than
a year's worth of property appreciation (in a normal market), this
is an area where mortgage professionals need to be diligent in
determining if the program is suitable for the particular customer.
For example, if the customer is someone who has his back up against
the wall facing foreclosure, the cost may be an insignificant
factor. And in this case, the consideration of moving to save money
makes less sense than spending a year's worth of appreciation.
However, if a customer is looking at a reverse mortgage as a
convenient way to access funds, but may not have an immediate need,
perhaps its not the right fit. Most people fall somewhere in the
middle, and many actually find that if they have any need at all,
the benefits outweigh the expense.
On July 30, 2008, President George W. Bush signed into law the
Housing and Economic Recovery Act of 2008 (HR 3221), also called
the American Housing Rescue and Foreclosure Prevention Act of 2008,
Building American Homeownership Act of 2008, Clean Energy Tax
Stimulus Act of 2008, FHA Manufactured Housing Loan Modernization
Act of 2008, FHA Modernization Act of 2008, Mortgage Disclosure
Improvement Act of 2008, and REIT Investment Diversification and
Empowerment Act of 2008. The provisions from this bill that will
directly affect the reverse mortgage industry are in the FHA
Modernization Act of 2008, and should take 60 to 90 days to
implement, which will probably equate to Wednesday, Oct. 1,
2008.
This bill will help curb some of the costs involved in closing a
reverse mortgage, including restricting the origination fees that
can be charged. Mortgage professionals will still be able to charge
a two percent origination fee on the first $200,000 of home value;
however, now only one percent can be charged on any amount over
$200,000 to the home value limit. The total fee that can be charged
is capped at $6,000. Mortgage professionals are still not allowed
to charge for processing, so that will remain an expense coming out
of the origination fee.
One area in which there weren't any changes, the up-front
mortgage insurance premium, warrants a second look toward the
reduction of reverse mortgage closing costs. This fee is expected
to remain at two percent of home value to program limit. As you are
probably aware, this insurance is placed to cover costs involved if
a lender goes out of business and HUD has to take over the
servicing of the loan. However, even in the current market where
lenders are dropping off from coast to coast, the likelihood of
this happening with any reverse mortgage service to the point that
it would have any large impact is slim. The up-front mortgage
insurance premium is also in place to cover the case in which the
last person is out of the home, and there is a deficiency between
what the home can be sold for and what is actually owed to the
lender. However, there most likely won't be enough of these claims
to justify the expense of the insurance.
With HUD requiring that borrowers receive third-party counseling
before committing to a reverse mortgage, further fees are incurred
for the counseling. One way to reduce the senior's cost would be to
cover it from the mortgage insurance fundsomething it appears
Congress will allow in the future. As of now, it is paid by the
mortgage professional or the customer. Absorbing the cost into the
mortgage insurance fund would save the customer $125 in most
cases.
Combating a bad reputation
Another hurdle we must rise above is the few bad apples out there
that create a nasty reputation for the reverse mortgage industry.
For example, a loan originator decides to line his pockets with an
additional commission by selling a 30-year annuity to an
unsuspecting 75-year-old. These instances often become the
highlight of the nightly news, many times branding the reverse
mortgage as a bad program, rather than the annuity or the
individual who sold it. The newest legislation, HR 3221, will go
further to prohibit requiring the purchase of annuities, or any
other financial product for that matter.
The future of reverse
A few additional enhancements to the reverse mortgage program that
should be official by Wednesday, Oct. 1, 2008 include the ability
to use a reverse mortgage to purchase a home, as well as an
increase across the board on home value limits. Currently, limits
are set on a per-county basis. With this restriction, anyone with a
home over the county's home value limit is forced to have his
benefit based on that limit amount, not what the home is actually
worth. At the time of this article, the increased loan limits are
in review with HUDs attorneys, and more information is expected to
be available soon.
These enhancements make it an exciting time for the reverse
mortgage industry. While faced with a few road bumps, mortgage
professionals can continue full speed ahead, making the future
exceptionally bright for the industry.
Gary Zimmermann is reverse mortgage specialist for Inlanta
Mortgage. He can be reached at (877) 326-5626 or via e-mail at
[email protected].
