Executive Conversations is a HousingWire web series that profiles powerful people in the financial industry, highlighting the operations and the people that make this sector tick. In the latest installment, we sit down with Steven Klein, Director of Institutional Lending at Reverse Mortgage Solutions, to find out how reverse mortgages can benefit both borrowers and lenders.
What is the biggest misconception about reverse mortgages?
The reverse mortgage, technically known as the FHA’s Home Equity Conversion Mortgage (HECM), is a very misunderstood product that has a much broader reach and more benefits to those 62 and older than illustrated in the numerous TV ads, in the media, and in the mortgage industry at large. The HECM product can certainly be used to increase a consumer’s monthly cash flow — that is a given. In addition, the HECM for Purchase program is a great way for those 62 and older to consider buying a home. The HECM line of credit can be a great tool when utilized as part of a larger financial planning strategy to keep more of your borrower’s assets in place to continue to grow.
How do originators benefit from offering reverse mortgages?
Reverse mortgages can add tremendously to the bottom line of any mortgage company because they can decrease the average origination cost per loan as more customers can be helped. At a time when refinance business is decreasing, the HECM program can not only allow for more loans to be originated, but can really help the consumer once the product is understood. It can also help expand referral business through the customers served and realtor and builder partners.
The HECM for Purchase helps loan officers add value and build stronger relationships with their realtor and builder partners as more borrowers will be able to qualify to buy a home.
Lenders can provide borrowers with a tremendous benefit by educating them on the various ways a reverse mortgage can be structured — whether through a refinance, a purchase or to potentially help grow their cash assets.
With over 8,000 potential borrowers turning 62 each day — 3 million annually — this segment needs to be informed of all their options by their mortgage lender.
How can reverse mortgages be used as part of smart financial planning?
The HECM is an important tool in any financial planning strategy, and can be used to:
1. Pay off existing mortgages, liens or other debt
This can free up hundreds of dollars monthly, providing significant cash flow relief, which will allow borrowers to age in place. With no credit score requirements and a make-sense income review coming soon — this is often a way to assist borrowers in meeting their objectives.
2. Buy a house
By using the HECM for Purchase program, seniors can buy a house without having to ever make another P & I mortgage payment again. Using a reverse mortgage for purchase allows people to buy a house — often a more desirable home — where they may spend the rest of their lives. Instead of paying cash for their home outright, buying a house this way can leave a larger amount of their cash investments in place to continue growing. That makes the reverse mortgage for purchase a win for the borrower, lender, as well as the realtor and builder community.
3. Spend down, potentially tax-free, the equity in their home before they tap into their cash assets
This allows their cash assets to have the chance to grow for many years before needing to access them. The equity does diminish over time, with the trade-off being more cash assets down the road.
So a reverse mortgage can be used to buy a house?
Yes. The FHA created the purchase program in 2008 to make it easier to downsize or relocate. For example, say someone from New York wants to move closer to family in Florida, or needs to move into a home that is adapted for senior living. They sell their house in New York and end up with $400,000 to finance their next house.
With a traditional mortgage they would have to come up with a down payment and closing costs, then make monthly payments for the life of the loan. They could also pay cash, which eliminates monthly payments but may use up their cash reserve.
Or — with the HECM for Purchase program — they could use a reverse mortgage for the purchase.
With this option on an HECM purchase of a $300,000 home, a 70 year old would need a down payment of approximately $147,000. This would leave about $253,000 from the $400,000 they had in their pocket when they left New York, versus only $100,000 if they were to do a cash purchase. In addition, they would have zero mortgage payments, since the reverse mortgage would cover the rest.
What obligations do borrowers have with a reverse mortgage?
The borrowers are responsible to pay property taxes, HOA dues if any, homeowner’s insurance and to maintain and reside inthe home. These are normally all items any homeowner would need to pay whether they had a traditional mortgage or owned the home free and clear.
Do reverse mortgages put a burden on the heirs of the borrower?
When an HECM borrower no longer lives in their house, due to selling, moving or death, the loan and interest come due and usually the house is sold at this point. If the house sells for more than the amount of the interest and loan, then the homeowner or their heirs will get the difference.
If the house is worth less than what’s due, the FHA as the insurer of the loan covers the remaining balance. Because a reverse mortgage is a non-recourse loan, the heirs are not responsible to pay the negative difference when the house is sold.
Heirs do have the opportunity to own the house by paying off the loan amount and interest — either with a new mortgage or by selling the house — but they can also choose to not take advantage of the opportunity.
How do you handle questions about heirs with a reverse mortgage?
From my personal experience in originating the HECM product for well over 100 families — one of the most common concerns is that there will be less, or potentially no, equity to leave to the heirs. The first question I always asked the borrower was how important it was to leave equity in the home to their adult children/heirs. If it was important to them — then it very well might not be the best direction to go.
However, what was refreshing was that when the adult children were brought into the discussion (as they frequently were) they were almost always the biggest advocates of the HECM loan, as they would rather their parents be the ones to benefit from the equity that they built than to be the recipient of that equity years down the road.
What’s next for RMS’s Correspondent and Wholesale channel?
We continue to grow our Correspondent and Wholesale partner base. Education, information and training are key. Our goal is to play a large role in making the HECM product become more mainstream. This will allow our Correspondent and Wholesale partners to assist more borrowers 62 and older to meet their financial goals and objectives.