Enactment of the Housing and Economic Recovery Act (HERA) carries what many view as a long-awaited modernization of FHA rules for reverse mortgages. The new law, which lowers fees while raising loan limits, has the industry speculating that a significant rise will be seen in FHA-insured reverse mortgages among middle-class seniors.
There are about 12 million seniors in the United States who own their homes; this equates to $4 trillion in equity.
Traditionally, reverse mortgages have been geared towards low- and medium- value properties. With higher lending limits and potentially lower origination fees, the reverse mortgage process should be more appealing and appear as a stable option for seniors interested in increasing their monthly cash flow. In return, the reverse mortgage is a great financial product for seniors to prepare and use for retirement planning.
The Center for Retirement Research calculated that 43 percent of working households were in danger of having too little income to fund retirement needs. Reverse mortgages are becoming more attractive as retirees consider home equity as a reliable income source.
A new secondary market especially for reverse mortgages is being built with Ginnie Mae HECM MBS (HMBS) securities, designed to broaden the reverse mortgage sector by offering lower interest costs to seniors and allowing issuers to securitize and sell FHA-insured reverse mortgages. Thus far, nine Ginnie pools have been issued and RMS has provided paper for the last four, acting as servicer, subservicer, master servicer and issuer on the loans – something even the largest originators can’t accomplish without external parties.
HMBS was considered a great security with potential for success, but its induction into the marketplace during the height of the liquidity crisis, could not have been met with worse timing.
Justin Burch, senior mortgage banking analyst for Ginnie Mae, explained that the chance for success of any mortgage-related product trying to make a mark in the secondary market at that time was slim to none.
Dissipating the negativity
HERA’s prohibition against having to purchase additional products as a condition for granting a Home Equity Conversion Mortgage (HECM) should help dissipate the negativity that the additional purchase requirement created towards reverse mortgages.
HUD/FHA has had a long-standing presence in the reverse mortgage sector through its HECM program, which is often referred to as the pioneer secondary market instrument. It was not the intention of HUD to devise a product that would dominate or be the only one of its kind in the marketplace.
It recognizes that the growth rate of the reverse mortgage sector is widely dependent upon the greater acceptance and development of new products from the private sector. This is becoming more feasible as smaller and mid-size companies gain entryway into the business through new origination servicing processes and technological portals.
The unique composition of the reverse mortgage product mandates providers to have a different skill set than required for forward loans. In addition, traditional forward mortgage loan software does not work for reverse mortgage servicing.
To combat the variances of the two distinct mortgage types, Reverse Mortgage Solution’s senior management designated a supervisory team for the development of a proprietary reverse mortgage servicing system. The system was designed to manage the RMS reverse mortgage portfolio in addition to having the capability to communicate with borrowers, originators and investors. The company expects to have a servicing portfolio exceeding 20,000 loans by the end of this year.
Article written by Bob Yeary, Chairman and Chief Executive Officer of Reverse Mortgage Solutions, Inc.