Once considered a product with high fees and pressure sales tactics, the reverse mortgage industry has steadily improved its procedures and image according to US News and World Report.
With rates and fees lowered, improved consumer disclosure, and the federal government’s insured reverse mortgage program has helped provide stability and credibility to the industry says Us News. However, the industry has had a hard time finding new customers.
The biggest reason is because of the principal limit reduction in October, which lowered the amount seniors receive from a reverse mortgage by 10%. With so much uncertainty about what the program will look like in the next few months, lenders are anticipating changes.
“There is no question that the product is going to be altered again. The only question is by how much,” says Jeff Lewis, head of Generation Mortgage. He supports the idea of a non-subsidized program but believes the government should adopt a broader definition of budget neutrality. In addition to direct subsidy costs, for example, he says reverse mortgages also generate taxable income to investors and that this benefit should be part of a broader measure of the program’s budget impact.
The reality is that the costs of reverse mortgages have come down and even the National Consumer Law Center acknowledges it. However, it notes that the lower loan charges are generally only available on loans where consumers pull down all their remaining home equity in a lump sum and it may not always be the best choice for borrowers.
Lewis addresses why the HECM fixed is seeing better pricing to US News:
“If a borrower takes out a line of credit, we don’t have a very large loan to sell,” Lewis explains, which is why recent price breaks have not been offered on line-of-credit reverse mortgages. He agrees it would be better for the market to have more line-of-credit loans, and that this use of the product would permit the kind of financial planning he advocates. In some situations, for example, it would be better for retirees to spend down their home equity while keeping funds in their retirement accounts. The accounts are likely to appreciate more than their home equity, and may carry tax advantages as well.
“Clearly, that’s not been going on,” Lewis says. “The majority of the loans we do are retiring other liens on the property. We’re not doing reverse mortgages for people whose homes are fully paid up. . . . We seem to be primarily helping people who are close to running out of their other sources of money.”
