It wasn't too long ago that the lending limit on the reverse mortgage (HECM) was increased to one national limit of $417,000 instead of lower limits that varied by county. The increase was part of HR3221, the FHA Modernization Act, passed in July, 2008. It wasn't until November, 2008, that HUD allowed implementation of the new limit. The increase allowed seniors (over 62) with home values above the old county lending limit to access more of their equity.

The limit has been raised again, this time to $625,500 which will allow access to even more equity on higher valued homes. 

I find this ironic in a time when most homeowners' values have fallen. However, for those seniors with higher valued homes, the increase fills the void left when jumbo reverse mortgages went away.  Since the jumbo reverse mortgage is not available in these current market conditions, the higher limit HECM essentially steps in for the defunct jumbo, but at much better interest rates and with the FHA insurance. 

It is a shame, though, that some seniors either refinanced their existing reverse mortgages or took out a reverse for the first time when the limit increased to $417,000.  Now, those with even more equity in their homes, may want to refinance to take advantage of the latest increase.  They will do it at a price, however, because they will be hit with closing fees once again.  They do get a break on the MIP (Mortgage Insurance Premium) when they refinance an existing reverse mortgage.  But, again, what a shame that our politicians and HUD were so short-sighted back in July of '08 when they limited the increase to $417,000.

The higher limit will be temporary and for the balance of 2009 only. Congress would have to act on it again before this year is out to extend it beyond '09.

It wasn't too long ago that the lending limit on the reverse mortgage (HECM) was increased to one national limit of $417,000 instead of lower limits that varied by county.  The increase was part of HR3221, the FHA Modernization Act, passed in July, 2008.  It wasn't until November, 2008, that HUD allowed implementation of the new limit. 

The increase allowed seniors (over 62) with home values above the old county lending limit to access more of their equity.  Raising the limit even higher, to $625,500 will allow access to even more equity on higher valued homes.  Since the Jumbo reverse mortgage is not available in these current market conditions, the higher limit HECM essentially steps in for the defunct jumbo, but at much better interest rates and with the FHA insurance.

If the new limit takes effect, it will be temporary and for the balance of 2009 only. Congress would have to act on it again before this year is out to extend it beyond '09.  The increase in the limit must still be voted on separately by the House and the Senate, so it is not yet entirely final.

Once both houses of Congress approve it, President Obama has to sign.  After the President signs the bill, HUD will have to issue a Mortgagee Letter to implement the change.

The last time the limit was raised, it took HUD nearly 5 months to interpret the bill and issue the Mortgagee Letter.   This puts seniors into another "lending limit limbo".  Let's hope they move faster this time! 

A HECM for Purchase is the FHA insured reverse mortgage that allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage.  This is a new program that became effective January 1, 2009. 

Previously, if a senior wanted to use a reverse mortgage to purchase a new principal residence, they had to secure financing for the home and then turn around and pay off that mortgage with a reverse mortgage.  The disadvantage was that it required two closings and the borrower incurred two sets of fees for the transactions. The new program - HECM for purchase - allows seniors to purchase a new principal residence and obtain a reverse mortgage with a single transaction and one closing. 

Here is how it works:  the reverse mortgage provides X dollars based on the borrower's age, appraised value, and a current interest rate (this is no different than a traditional HECM).   The remaining balance MUST come from the borrower's own funds and must be enough to purchase the new property outright. In most cases, the funds will come from the sale of the borrower's existing home, although savings and retirement funds can be used.  FHA is very strict on what is considered an acceptable source of funding.  No gifts, no credit card advances, no seller concessions - only funds that the borrower has in savings, retirement accounts or proceeds from the sale of their home are acceptable.  Seller financing is also not permitted and no subordinate financing is allowed.

An example:  Let's say the Smiths, who live in a large two-story home, simply cannot maintain the home anymore and find that climbing the stairs is getting more and more difficult. They find a cute condo that is perfect for them with an asking price of $220,000. It is a one-story unit on the ground floor. The maintenance is mostly taken care of by the homeowners association.  The Smiths refinanced their home a few years ago so they have a lien of $120,000 to pay off from the sales proceeds leaving them with $180,000 which is not enough to purchase the condo outright.  The reverse mortgage will provide them with $141,000, so they need to put down $79,000 to equal the sales price of $220,000.  That leaves them with a $101,000 nest egg and no house payments for as long as they live in the condo.

The HECM for purchase isn't necessarily for seniors who want to down-size.  It can be for those who want to up-size!  Here's another example: Let's say the Harpers live in a low-cost area and they want to move to a nicer neighborhood and to be near their children. Or they want to go to Arizona and live on a golf course.  The new home is selling for $250,000.  The sales proceeds from their home nets them $120,000.  The reverse mortgage will provide them with $161,000 on the new home.  They need to bring in a down payment of $89,000 which comes from the sale of their existing home.  Now they have a nicer home with no mortgage (and a little cash for a rainy day)!

Here are some highlights of the HECM for purchase program:

• Borrowers will still need HUD approved counseling, just as they would have with a traditional reverse mortgage.
• Can  be used to purchase an existing 1- to 4 unit property, FHA approved condo, and a manufactured home that meets HUD's guidelines (cooperatives are not allowed).
• Property must serve as principal residence
• Only HECM first and second liens against property
• Must provide monetary investment at closing from allowable funding source
• Must occupy property within 60 days
• Just like a traditional HECM, the borrower is responsible for taxes & insurance and home maintenance costs
• Unlike a traditional HECM, there is no three day right of rescission

The HECM for purchase won't meet the needs of all seniors - a hefty down payment is required.  However, for those who have an existing home to sell or have funds in savings or investments, the HECM for purchase can be another financing option for the purchase of a new home.  The real advantage of the program is that senior homeowners can purchase a home (and sell their old one) with no income or credit qualification and live in that home with no monthly mortgage payments for the rest of their lives.

Has anyone had the experience of submitting a loan with one appraised value and then the underwriter reduces the value???

I am in shock at what happened to one of my loans. We submitted an appraisal with a value of $300K which actually seemed low to me (and the borrower). The property is in California.

This borrower would have been short to close by about $5K at $300,000. At the last minute, the underwriter stated that they could only loan on $270,000 because the property is in a declining market. (Isn't all of CA a declining market??)

At $270,000, this borrower cannot do the loan and will lose his home. He cannot make the mortgage payments.

Does anyone have a similar experience and more importantly, does anyone know of any recourse to help this borrower? I have submitted the loan to another lender with hopes that they will accept the appraisal at face value. Let's pray that they don't do the same thing as the first lender!

"Should I wait to do a reverse mortgage"?  I get this question all the time from senior homeowners considering a reverse mortgage.  The answer is: "It depends..."

I then ask the borrower, do you need it now?  If the answer is "yes", then waiting may not be to your advantage.  Yet convincing these folks that it is in their best interest to move forward NOW is a very difficult task.  Of course, I realize that I have a built-in bias - I make my living originating reverse mortgages. However, I have a responsibility to help these folks understand that they may not have a better opportunity in their lifetime. 

Before we address why it may not benefit a borrower to wait, let's talk about why folks are taking a wait and see attitude about reverse mortgages.  Partly it is because we just came through a lending limit limbo while we all anxiously awaited HUD's decision on the new national lending limit that was signed into law with HR 3221, the housing bill.  Even when the legislation passed, the interpretation as to the new limit was vague at best and it took weeks before HUD finally announced on October 2^nd that there will be one national lending limit of $417,000.  So anyone with a higher valued home wanted to make sure they got the most from their reverse mortgage.  I don't blame them.  They were wise to wait. 

What is ironic is that the folks who have home values that would not benefit from the increase in the limit were also sitting on the sidelines waiting to see what the new limit would be.   Why was that?  I think it is partly because they didn't understand that the new limit would not impact the amount of equity they could access.  Or perhaps they were waiting for lower fees.  Although, unless they have a home valued over $300,000, the new law that reduces the origination fee won't affect them either.  But, these folks just didn't understand all that, nor should they. They aren't reverse mortgages specialists.

But now that HUD announced the lending limit and is tentatively shooting for a November 1^st effective date, many folks are still putting off taking out the reverse mortgage that they need so badly.

Perhaps they think that by waiting they will get more money down the road? I hate to disabuse them of that notion, but the fact is that by waiting they are risking further declines in the value of their home and an increase in the interest rates that affect the reverse mortgage. 

To understand how this works, consider that there is a formula for calculating the amount of equity that can be considered for a reverse mortgage.  The formula includes three very important variables:  1) The age of the younger borrower, 2)  the value of the home up to the lending limit, and 3) an interest rate that we reverse mortgage specialists call the expected rate which is based on the 10-yr. T bill or the Libor as an index. When any one of these variables changes, the amount of proceeds can be impacted.  For example, if the home value drops, the amount of money the borrower gets is less.  If the expected interest rate increases, the borrower will get less money. 

Let's say a borrower has a home valued at $300,000 and this borrower is 72 yrs. old.  At the time the borrower signs the loan application, the expected interest rate, which is based on the 10-yr. T-Bill is 5.4%.  Once the calculations are performed, this borrower is eligible for $195,500.

What if this borrower waits and the expected interest rate rises to 5.59%?  If the value of the home is still $300,000, the borrower is now eligible for $192,000, $3000 less.  Maybe that is no big deal, but what if the borrower has a mortgage of $194,000?  By waiting, he is now $2000 "short" and will have to bring in that money to close the loan (all liens, mortgages, etc. MUST be paid off with the reverse mortgage proceeds).  So waiting, especially for a borrower who needs the entire reverse mortgage proceeds to pay off their existing mortgage, can leave that borrower short-to-close.

Now, what if while this borrower was waiting, the home value fell to $290,000?  If the expected interest rate stayed at 5.4%, this borrower is now eligible for only $188,000!  This is a huge risk to take, especially if there is an existing mortgage to pay off.  Home values are predicted to continue declining throughout 2009.

What is most likely to happen is that this borrower will be hit with a double whammy - the home value will fall AND the expected rate will rise.  What if the home value falls to $290,000 and the expected rate rises to 5.59%?  Now the borrower is only eligible for $185,400, almost $10,000 less than he would have gotten had he not waited.

Of course, again, it depends on what the borrower's needs are.  If they don't have a pressing need such as paying off an existing mortgage or a need for income to make ends meet, then maybe the loss of access to the extra $10,000 won't make a difference to them and there is no need for urgency.

But there is another argument for not waiting to do a reverse mortgage that is often overlooked and that is quality of life and the time we have left on this earth.  I call this "lost life opportunity".  What if because of a lack of money the borrowers miss out on the opportunity to visit family in another state, to eat out more often, to take all the grandkids to the movies, and just simply be able to pay all the monthly bills without robbing Peter to pay Paul - how do you put a price on that?  Reverse mortgages aren't always about numbers and dollars and cents - they are about what the money will DO for us. No amount of waiting will ever make up for these lost opportunities.

So back to my original question:  Why do people put off doing something what is in their best interest, other than a lack of understanding of how the reverse mortgage works, as explained above?

I believe it is simply fear.  Fear of making a decision because it may be the WRONG decision.  And this fear comes out in spades when society in general is in turmoil and the only thing that is certain is uncertainty itself.  Fear creates paralysis.  Even though rationally it may be in a person's best interest to make a decision and move forward, inaction tends to be the human response to fear.  When there are perceived threats, our biology tells us to sit quietly, don't draw attention to yourself, and don't move in any direction (thus the "deer in the headlights" syndrome).

And there is plenty of fear to go around.  Credit crunches, Wall Street woes, bank failures, declining markets, foreclosures on every corner - it is enough to make a person want to go to bed and stay there until everything is normal again (which is an illusion!).

My advice to my senior clients is that we have to overcome this emotional paralysis and try to make decisions based on logic and reason.  The reverse mortgage program is just as safe as it was a year ago or twenty years ago when it first became insured by the FHA.  The program is still highly regulated, has built-in guarantees, and is insured by the full weight of the government.  None of that has changed.  What has changed are our economic situations, our home values, and an increase in the climate of fear.

Another question I get from seniors is "What if I need the equity in later years and I have used it all up with a reverse mortgage?"  My response to them is this:

First of all, what are "later years"?  The average reverse mortgage borrower is 72 yrs. old.  That seems late enough for me.  How much longer should they live a life of sacrifice waiting for some unknown need for equity in the future?  Now seems to be a good time to start living life. Life is short.

As for "using up" all the equity, if the distribution of funds is set up correctly, there should be money left on a growing line of credit.  In fact, many of my clients use the reverse to "lock in" some equity and preserve it for future years.  That way, if home values plummet, they are guaranteed the equity in their line of credit.

Also consider that many borrowers use some of their reverse mortgage proceeds to pay off existing liens, as we discussed earlier, thereby freeing up cash flow.  The house payment they no longer have to make could be saved or invested for a "rainy day" if that is a concern for them.

Equity is really an illusion.  As we have so painfully seen in recent months, equity can come and it can go based on market conditions.  Who's to say that the senior will even have a substantial amount of equity in their home in the future?  Even if they did, we are back to how are they going to access it.  Short of selling the home, they will most likely get a reverse mortgage. 

This concern, that there may not be equity in future years "when they need it", is based, I think, on fears that they may need funds for long term care or need to sell and move into assisted living.

Let's think about this:  Even if they did not do a reverse mortgage, there isn't enough equity in the average person's home to cover very many years of paying for assisted living or other long-term care facilities anyway!  Once their funds run out, if they don't have a long-term care insurance policy, they will have to apply for Medicaid to pick up the slack.  So the equity they could have used a few years ago, to make life more enjoyable, is used up anyway! 

So, why not use the equity now, set up a line of credit, pay off existing mortgages, and use some of the proceeds to purchase a long-term care insurance policy? (I realize this is not always realistic based on health and age, but a person in their 60's and perhaps early 70's, should consider this as an option).

The unused balance on a reverse mortgage line of credit grows each month and can literally double in 10 years.  Many reverse mortgage borrowers are setting these up to use for in-home care when and if they should need it.

Every borrower's situation is different.  Anyone considering a reverse mortgage must get all the facts and rely on the advice of not only a reverse mortgage specialist like myself, but also get unbiased professional advice from someone who also understands reverse mortgages.  While waiting sometimes make sense in certain cases, for the most part, very little will be gained by waiting.  And remember, there is nothing to fear but fear itself.

Announcing Reverse Mortgage Training Solutions

I am thrilled to announce that my new company, Reverse Mortgage Training Solutions (RMTS) is now available to train anyone who wants to become a reverse mortgage originator.  Good quality training is sorely lacking and RMTS will fill that void.

Reverse mortgages are a high-demand niche market that is growing exponentially with the aging of America.  Older adults are facing financial hardships that the reverse mortgage could help solve.  RMTS training programs equip new and existing loan officers transitioning into reverse mortgages with the tools and resources to position themselves as the local expert on reverse mortgages.

http://www.reversemortgagetrainingsolutions.com

RMTS offers four distinct training products and services for new & experienced reverse mortgage originators and for companies who need to train their loan officers.  The RMTS suite of products includes:

RMTS COMPLETE!  Coming soon!  This is a comprehensive online course for loan officers, mortgage brokers and anyone who wants a career as a reverse mortgage loan consultant.  The course is self-paced so that the very busy loan officer can fit it into their schedule.  It consists of 4 modules with approximately ten hours of interactive, engaging instruction in everything needed to be successful in the reverse mortgage industry including product knowledge, marketing strategies, and sales training.  Sylvia has layered the course with an ethical approach to working with seniors as well as sharing her real-world experience, having originated over 375 reverse mortgages herself.  

RMTS DIRECT!  Available now!  RMTS offers cost-effective, onsite, customized workshops for small to mid-sized lenders who do not have the resources or expertise to train their loan officers in reverse mortgages.  RMTS workshops are interactive, challenging - and downright fun! Pick and choose from three core subject areas. Take each workshop as is, or create your own by mixing and matching topics based on your team's needs. 

RMTS LIVE! Available now! Join us for focused webinars aimed at providing reverse mortgage consultants real-world training and information on specific topics that cover sales & marketing, product knowledge, and how to successfully work with seniors.   All of the RMTS LIVE! webinar events will be hosted and conducted by reverse mortgage industry expert, Dr. Sylvia Williams, CSA. 

RMTS CLUB!is a ‘members only' website that will be available for a low annual fee.  The club will offer a variety of benefits to include the first module of the RMTS LIVE! course for free, industry updates,  monthly newsletter filled with sales and marketing tips, discounts on webinars, marketing materials, a job board, and much, much more! 

If you want more information, please contact me at:  Sylvia@reversemortgagetrainingsolutions.com

I got an email asking me about the HECM limits and I thought my response might be helpful to some of you:

Sylvia - Do you have any idea when the national loan max is going to be applied to Reverses? Also, do you have any info on the applicable percentage that will be applied against this amount based on the customers' ages? Clearly, we can't use the calculator for this so I was hoping you had that info or a way to get it. I have two clients now looking at the reverse product and I cannot tell what they will have available. One couples' ages are 67 and 64 and the others' are 70 and 67. FHA is no help at all, and as much as I know about this product I still cannot find a good referral source that I can trust. Both clients are in New York and the property values will each exceed the $417k. Many thanks,___

My response:

Hi ____: Yes, this is SO frustrating!  The national limit could be at least $417,000.  As NRMLA stated, HUD's lawyers have not resolved whether the bill creates a single national loan limit at $417,000 or $625,500; or area limits at 115% of area median home value, with a floor of $417,000 and a cap of $625,500. There is also mixed information regarding how long it will take HUD to issue a Mortgagee Letter to implement the increase, ranging from October 1, 2008 to January 1, 2009. Even if the limit increases to $625,000, the county where the subject property is located will need to qualify for this increase.  With recent drops in home values, many counties will not benefit from the increase.  I don't know your market, but I imagine most of NY will be considered a higher valued area.

Did you know that you can run scenarios up to home values of $544,185 by entering a Hawaiian zip code such as 96746 into your RM calculator? Just remember to adjust the origination fee.  For values higher than the $544,185, you will need to manually calculate. As for the percentage, who knows what HUD will do.  I am manually basing the amount on the same percentages that exist now.  But, I suspect that the formula will adjust the percentage down with higher values.

I hope that helps!

Sylvia

My, My.  I guess I stirred things up a bit.  I made a comment in my Blog Post Breaking News! One National HECM (Reverse Mortgage) Lending Limit passed by the Senate! about the cross selling of financial products to seniors.

Here is what I said in regards to a provision in the legislation HR3221: "It is about time that someone restricted the cross selling of financial products and annuities to seniors.  These are for the most part inappropriate products and have given reverse mortgages a bad name. It was not so much the reverse mortgage itself, but the inappropriate use of the proceeds that created the bad press."

Here is an email I got:

Dear Dr.: I am curious why you feel that cross selling is incorrect?  If you had an eighty year old Aunt Alice living in a $100,000 home and no real savings and barely making it, why would you not want her to get a RM with the housefixed up, purchase a $10,000 Medicaid Approved Pre-Need Funeral Plan for her and Uncle Henry who has early stages of a serious illness with no more than five years to live? Let's together respectfully analyze this situation and see what are the best options for them.

Here is how I responded:

Dear___,

Are you a reverse mortgage consultant?  I sure don't have any issues with the Aunt Alice in your scenario getting a reverse mortgage to fix up her home and perhaps have some extra to live on.  And, if the $10,000 Pre-Need plan makes sense, I don't have a problem with that, either.    

However, I do have a problem with selling seniors unneeded financial products just to make an extra commission.  I find that annuities - in most cases - are not appropriate in that they tie up the senior's money, create taxable income, and sometimes provide less income than the tenure option.  But it sure does create a nice commission for the insurance agent!  (And by the way, I am a CA licensed life agent).

However, I might have been hasty in my blanket statement and should have taken more time to explain what I meant.  My real point was that selling annuities to seniors has created some major bad press over the years and that it was not the reverse mortgage per se that was the culprit, but the inappropriate use of the proceeds.  I do recognize that not all investments are bad.  But I do believe the senior should get unbiased financial advice.   Thanks for writing to me!

Sylvia

I really goofed on my calculations in my last Blog, Breaking News! One National HECM (Reverse Mortgage) Lending Limit passed by the Senate!, and a couple of brokers pointed out my mistake (thanks, guys!).

I commented on how my client would benefit from the increase in the lending limit to $417,000.  I explained that with the current lending limit of $372,790, they would be $50,000 short of being able to pay off their existing mortgage and that with the new limit, they could access enough equity to just cover the mortgage.  I was so looking forward to telling them!

Well, I didn't calculate correctly.  Because our reverse mortgage calculators do not yet reflect the new lending limit (HUD has yet to give their blessings with a Mortgagee Letter), I did a quick calculation but failed to take into account that not all of the increase will flow to the bottom line.  

It appears that my borrower will only have access to an additional$35,000 of that increase, not the entire increase, leaving them still short by $25,000.  That is much better, but if you don't have $25,000 it might as well be $50,000!

Here is my new calculation:  With the current limit, the Principal limit is approximately $242,000 which is 66% of the limit of $362,790.  Applying that same percentage to $417,000, I get a principal limit of $275,000.  Then of course, the service set-aside of approximately $5000 (this is not a fee, but it is an equity reserve) is deducted plus approximately $15,000 in fees, leaving the borrower with a net principal limit of $255,000.  With a mortgage of $275,000 to pay off, they are still short.  Sigh....

I always own up to my mistakes and I really appreciate those of you who pointed this out to me.   That's what I get for being in a hurry!   

Today, July 26^th, the Senate passed HR 3221, Foreclosure Prevention Act of 2008, also known as the "FHA Modernization Act" and the President is expected to sign it immediately.

This bill provides for needed housing reform in general but has direct impact on the HECM (Home Equity Conversion Mortgage) specifically.

The bill will establish one national FHA lending limit for HECM's at $417,000. (The limit will be increased for high cost areas to $625,500 on January 1^st, 2009). Currently the highest FHA lending limit is $362,790.  What this legislation means for senior borrowers is that they can now access more of their equity.  For example, I have 69 yr. old clients who can barely make their house payment.  Their mortgage balance is $275,000.  Their home is worth approximately $450,000.  With the current county lending limit of $362,790, they are only eligible for $224,500 which won't cover their mortgage.  They are what we call in the industry "short-to-close" by about $50,000.

Now, with the increased lending limit of $417,000 they have access to an extra $54,000 of their equity which will be enough to pay off their mortgage.  They are going to be thrilled!

The increase in the lending limit is a real blessing for some folks.  However, it won't make a bit of difference if the value of the home is under the current lending limit.  For example, if a borrower has a home value of $350,000 in a county with a lending limit of $362,790, no extra equity is available.  However, if that same home is in a county with a county lending limit of $206,000, the increase in the lending limit will free up $144,000 more that they can access! This legislation is a HUGE benefit in counties with lower lending limits but higher priced homes. 

The other benefits to seniors are:

• HECM for home purchase
• Co-op product provisions
• Origination fees of 2% on the initial $200,000 in maximum claim amount and 1% on the balance thereafter with a cap of $6,000
• Prohibitions on requiring the purchase of annuities and other financial products.
• Restrictions around cross selling financial products.
• Requirements on counseling protocols, funding and practices that promote independence and quality in counseling.

It is about time that someone restricted the cross selling of financial products and annuities to seniors.  These are for the most part inappropriate products and have given reverse mortgages a bad name. It was not so much the reverse mortgage itself, but the inappropriate use of the proceeds that created the bad press.

The reduction in fees has been a long time coming!  The origination fee is now capped at $6000.  Prior to this bill, the maximum origination fee was $7255.  Now seniors can access more equity at a lower cost.  We are making progress!