Yesterday's post  was about using a Reverse Mortgage for foreclosure rescue and I received a few questions about how that works if the borrower has little or no equity in the property.

The answer is that many lenders will take a short payoff now. Some still won't, and I posted yesterday about how mad that makes me, but many will. If you are asking why they will take less than they are owed, even if it is less than the appraised value, the answer is that they have written down the value of the loan on their books already (Remember the 100 Billion in writedowns last year?) and they will actually sjow a profit if they take a percentage of the loan now or they have sold the loan at a tremendous discount (between 30 and 50 cents on the dollar) to a new lender that is very eager to make a quick buck.

Pretty much every non-performing loan falls into one of these two categories (or both) and many lenders will take a huge cut to get paid now as opposed to waiting and taking the risk that 1) values will drop a lot more 2) they will have to wait years for the foreclosure process to conclude and 3) they will end up having some crazy judge or legislation that will hold them up even longer than expected.

 

I have seen a huge spike in requests for Reverse Mortgages for borrowers who are in foreclosure.

In my opinion, the Reverse Mortgage is the absolute best outcome to the already bad situation because the borrower gets to stay in their home, they have no more issues with making payments and the lender gets paid off now (albeit a reduced amount in many cases.)

Many lenders are still not taking the proceeds of a Reverse Mortgage and this is something that should be addresses on a national legislative level. It just makes no sense that a lender will take a certain amount if the property is being sold and will not take the same amount if the borrower is using a Reverse Mortgage to stay in their home.

Okay, many, many people have asked me how a Reverse Mortgage for purchase works. Here it goes:

The borrowers are buying a home and they are 62 or older. The amount that the borrower will get is based on their age, the older they are, the more they get. Here is an example of a loan that I just closed:

A 68 year old couple was downsizing from their large home to a condo that they were buying for $575,000. They were eligible for about $360,000 after closing costs. They originally had wanted to use all of the proceeds from the sale of their home and a big chunk of their savings to have "no mortgage" After I spoke to them, we concluded that what they wanted was not "no mortgage" but really "no payment"

They used the Reverse for $360,000 and only used their own funds for the $215,000 remainder. They got to keep $360,000 in their savings and still have no monthly mortgage payment.

The lenders are very particular about where the other borrowers funds are coming from. The borrowers need to be able to show these funds available to them or if they are coming from a sale, they will need to show a HUD-1 from closing.

Reverse Mortgages for Purchase have been available for years, but only as a "Jumbo" propietary loan. Last year, the govenment finally started allowing it for Home Equity Conversion Mortgages (HECM's) which was good timing, considering that most of the Jumbo products were discontinued late last year.

The first HECM for purchase closed in March becaus eit took HUD a while to get the guidelines staright (we're all still waiting for the guidelines for teh HECM for Co-op's)

The Reverse Mortgage for purchase is starting to take off. Although very little data is available at this point, from speaking to lenders and from my own experiences (we have closed a few) it is clear that the word is getting out  to Realtors and developers that Reverse Mortgages can help their business.

I'll post the specifics about a Reverse Mortgage for Purchase works tomorrow.

I hear all the time from elder law attorneys and financial planners who don't understand how Reverse Mortgages work, that "the client should just sell the property."

What they fail to comprehend is that over 89% of seniors want to stay in their home (according to AARP) and many have told me that they hope to die in the home that they have lived in for so much of their lives. Telling them to sell their property is not only inconsiderate and won't happen, but in today's environment where much of their value has diminished lately, is probably a bad move for many reasons.

The most absurd part of this strategy is that most of the time it is seen as a lower cost alternative to a Reverse Mortgage. Although Reverse Mortage costs are hig, are they higher than the realtor's commission ona sale? Most of the time they will not.

I know I've posted about this before, but it has now been almost eight months! since the government announced that the Federally Insured Reverse Mortgage, the Home Equity Conversion Mortgage (HECM) would be allowed for Co-ops and we still have no idea when thsi will actually be put into effect.

This may not apply to most of the country, but here in the NorthEast, it is becoming a big problem. Teh problem is that a lot of borrowers (I have about a dozen) got caught when all of the propietary (Jumbo) Reverse Mortgage products that allowed for Co-ops, stopped last year and they are still waiting fo rteh HECM to rescue them.

Hopefully, we'll hear something soon.

 

 

Atare Agbamu is a Reverse Mortgage veteran who has recently discovered that there is a problem in a recent mortgagee letter that limits the non-recourse aspect of a Reverse Mortgages to sales only.

What this means is that HUD and everyone in the Reverse Mortgage business have been saying that Reverse Mortgages are non-recourse loans for many years. This was interpreted as the fact that when the loan terminates because of sale or after the death of the last borrower, the lender would accept whatever the home is worth, even if the loan balance is higher.

A slight change in the law last year is causing some problems because HUD now interprets the law as only applying when the property is sold, either by  the borrower or by their heirs. What this means is that if the borowers pass away and the heirs choose to keep the home and want to pay off the loan, they WILL be responsible for the loan balance even  if that is more than the home is worth.

Now this only happens in a very small percentage of cases because most heirs sell the property and will have no problem. However Mr. Agbamu is rightfully very upset by the change. His main points are that HUD has, for years, touted the non-recourse feature and that now the change in the law will probably cost HUD money because HUD will be forced to purchase the home in cases where the heirs wanted to keep it and pay only the market value. His points are excellent because no one is going to pay HUD or anyone more than the property is worth anyway. If the heirs want to stay in the home, they should be treated no worse than soem outside buyer.

 Mr. Agbamu's blog post about this can be found at:

 http://www.thinkreverse.com/?p=91#respond

 

I was going to put some links up for the recent articles and Television pieces on Reverse Mortgages, but there were too many!

Most of them were pretty good, but there are still so many uneducated people out there that still call Reverse Mortgages "loans of last resort" and who think that anyone taking a Reverse Mortgage is deperate. This is clearly not the case.

Many Reverse Mortgage borrowers have many other options and choose a Reverse Mortgage because of the many benefits.  

Nick Timiraos who wrote a very good piece in the WSJ last week was interviewed along with a CNBC Real Estate Consultant about Reverse Mortgages. Although his article was very good, he comes off as not so happy about the product. It's a pretty short clip. I think if they gave him more time, he would have been able to articulate a little more.