Reverse Mortgage Revolution: Why They’re Better and Safer Today
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The reverse mortgage is a fairly new financial product, having come into widespread use only in the late 1990s. As the trials and errors of government agencies, non-profits, homeowners, and lenders added to the body of knowledge about these unique mortgages, they became safer and better for all parties. Here are some of the most important ways the programs have been improved and what additional reforms are on the way.
Reverse Mortgage Milestones
The first reverse mortgage was underwritten back in 1961 in Portland, Maine. However, they were not highly regulated or very popular until 1988, when the Federal Housing Authority Insurance Program became law. The federal government, with the input of the AARP, introduced a reverse mortgage test program. 50 lenders nationwide were chosen to participate, and in 1989, the first government-insured reverse mortgage was given. In 1998, the program, now referred to as the Home Equity Conversion Mortgage, or HECM was expanded to all lenders throughout the country. 90 percent of all reverse mortgages are HECM loans.
Even the “Bad Old Days” Were Pretty Good
While the last few years have brought more positive changes to reverse mortgage products, seniors overwhelmingly endorsed the product even before the improvements took place. A 2006 AARP survey found that nine of ten seniors were happy with their reverse mortgages and only three percent of borrowers were unhappy with them.
Reforms in 2008
The Housing and Economic Recovery Act (HERA) of 2008 included a few provisions designed to improve reverse mortgages. First, it provided funding for reverse mortgage counseling. Although counseling was required for people to get HECM loans, it was previously paid for by private lenders. By deciding which counseling programs got funded, reverse mortgage lenders were indirectly able to control what was said to prospective borrowers. For example, even though most experts agreed that it takes one-to-two hours to fully explain reverse mortgages to potential borrowers, some seniors reported that they were counseled for only about ten minutes.
Establishing counselor independence
In fact, it was not uncommon for reverse mortgage and insurance salespeople to get their credentials as “counselors” and really control the flow of information. Other counselors provided referrals to lenders for commissions – hardly independent sources of information. So the second reform that HERA brought about was the requirement that reverse mortgage counselors be certified and approved by HUD. HERA also specified that mortgage counselors not be associated with or compensated by anyone involved in the sale of insurance or reverse mortgages.
Restricting the sale of annuities
One of the uglier abuses of reverse mortgage buyers came at the hands of sellers of long-term annuities. These fast-talkers used reverse mortgages to sell highly-profitable insurance products that were almost always completely inappropriate for the elderly. They’d convince seniors to pull money out of their homes with reverse mortgages (charging scandalous fees in some cases), then convince them to tie that money back up with a long-term annuity scheme. In one notorious case, an eighty-year-old woman who wanted to borrow some money “to fix her porch” was peddled a reverse mortgage for $209,000 and then sold two annuities, including one with a penalty of twenty percent for any withdrawals made during the first ten years.
HERA’s provisions ensure that no entity involved in the origination of a HECM can be involved in any way with “any other financial or insurance activity” or “require the purchase of any other financial or insurance product.” In addition, no reverse mortgage lender (even non-HECM) or any other party can require the borrower to purchase an annuity or other insurance in order to qualify to purchase a reverse mortgage.
Limiting origination fees
HERA also limited the origination fees for HECMs to $6,000. However, just because lenders can’t charge more than $6,000 doesn’t mean they can’t charge less – in some cases, a lot less.
Today’s Reverse Mortgages
One of the main costs of HECM products is the upfront mortgage insurance, which is charged by the government, not the lender. It’s significantly higher than that of ordinary FHA loans because the upfront premium is two percent of the property value — not the loan amount. So someone wanting to borrow $40,000 against a $400,000 home would be charged an upfront premium of $8,000, or 20 percent of the loan amount!
This problem was solved by the HECM Saver loan. The Saver lets you borrow ten-to-fifteen percent less than the standard HECM, but the upfront insurance is only .01 percent. On the $400,000 house, that’s just $40.
Today, it’s easier than ever to compare reverse mortgage rates. Some lenders offer reverse mortgages with no servicing fees and no origination charges. Rates and terms vary, so it’s important for you to shop with competing reverse mortgage lenders. Don’t expect the government to do it for you.
The National Council on Aging has updated its guide Use Your Home to Stay at Home for 2013 to supply current information to seniors considering reverse mortgages. You can download a free copy HERE.
Even more changes to HECM are around the corner, courtesy of the Consumer Financial Protections Bureau (CFPB).
As of April 1, 2013, borrowers seeking fixed-rate HECM mortgages will be limited to the HECM Saver product only, meaning they will not be allowed to borrow the maximum equity available under the HECM. That’s because during the recent real estate crisis, in which property values dropped in many parts of the country, many properties financed with HECM fixed-rate loans ended up drastically underwater, causing losses to the program that threatened its ability to continue.
Of course, jumbo or proprietary reverse mortgage lenders can create their own programs and make up their own rules. One of these programs may work better for you. LendingTree recommends that you seek the advice of a HUD-approved reverse mortgage counselor or a trusted financial advisor before committing to any reverse mortgage plan.