(Update 1: adds in U.S.-based lender perspectives on assisted care provisions in HECMs)
A growing number of older Americans are securing reverse mortgages according to Home Equity Conversion Mortgage (HECM) data recently released by the U.S Department of Housing and Urban Development
Brokers of these types of mortgages, such as Golden Gateway Financial,
say this product is a necessary step to increase borrower cash flow in retirement or to avoid financial troubles, however asset managers are voicing concerns.
According to HUD, HECM reverse mortgage application volume increased over 7,000 from 2008 to 2009, 4,603 of which were endorsed by the Federal Housing Administration
. Golden Gateway says HUD showed endorsements in March 2009 that were up a significant 24 percent from February of 2009, setting a new monthly record at 11,261 insured loans during the month.
"As retirement investments have plunged and work opportunities grow scarce, reverse mortgages have become a valuable retirement planning tool for many older Americans," says Eric Bachman, founder and CEO of Golden Gateway Financial. He says reverse mortgages are also a means for those older Americans currently facing foreclosure or financial jeopardy to generate cash independent of a credit score or income requirements and ultimately secure a home.
The jump in volume was likely boosted by increasingly flexible criteria. Over the past year, the HECM loan limit was raised from $417,000 to $625,500, likely making reverse mortgages more attractive for homeowners in high cost areas. Recent legislation capped reverse mortgage fees, such as closing costs, limiting expenses for older Americans. And Counseling fees can no longer be paid by lenders or brokers, in effort to promote unbiased information from counselors.
A reverse mortgage allows a homeowner age 62 or older -- which now includes the baby boomer generation -- to obtain money by accessing the equity available in their home tax-free and with no requirement that it be paid back until the borrower dies or chooses to sell the home. When one of these two instances occurs, however, the cash received from the reverse mortgage plus interest and other fees must be payed to the lender.
According to the numbers, in many instances, reverse mortgages seem to be the answer for older Americans who have been battered by the state of the recent economy. Nonetheless, reverse mortgages can effectively strap an already troubled borrowers into a home as early as age 62, if the borrower doesn't have a means of paying back the reverse mortgage. And if a borrower's life span doesn't exceed the life of the reverse mortgage, their heirs must repay the loan through the sale of the house or some other payment, if they choose to keep the house -- not exactly the traditional custom of leaving an estate to a younger generation, according to one source who spoke confidentially to HousingWire.
"There are advantages and disadvantages to reverse mortgages. One consideration is that house prices have to run a 1% per annum increase in value in order to be financially sound to the broker," explains the asset manager for a major European bond firm. "While this type of refi allows the borrower to go on holiday or refurb the home, there are social values pertaining to an end-of-life scenerio. Most people don't realise, for example, that if you get placed into a care home for any period of time, typically, you get booted out your house and your house gets resold by the broker."
U.S.-based reverse mortgage lenders, however, say that HUD has very specific guidelines determining residency and care, designed to protect seniors from just such alleged abuses.
"In fact, HUD provides specific guidelines that a stay for up to 12 consecutive months in an assisted care facility, nursing home, etc., will not cause the reverse mortgage to become due and payable," a reverse mortgage specialist told HousingWire. "But, a stay exceeding 12 consecutive months can cause the reverse mortgage to become due and payable. This is a wonderful exception to the customary 180 day occupancy requirement for a principal residence and applies very well to the senior community who may need a recuperative stay somewhere besides the primary residence."
Kelly Curran at email@example.com
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade