Posted on Monday, October 4, 2010
Changes on Reverse Mortgages Will Alter Fee Structure
By TARA SIEGEL BERNARD NYT
Reverse mortgages, which allow homeowners who are at least 62 years old to tap their home equity without making any mortgage payments, are typically used by borrowers who want to remain in their homes but need the money to pay off other debts.
The vast majority of these mortgages are made through the Federal Housing Administration’s Home Equity Conversion Mortgage Program. Starting Monday, the program will introduce a reverse mortgage product known as the Saver, which will nearly eliminate one of the biggest upfront fees that borrowers are required to pay. But the program will also make changes in its standard reverse mortgages that will significantly increase certain costs but, in some cases, make more money available.
“It really changes how we think about reverse mortgages,” said Barbara Stucki, vice president for home equity initiatives for the National Council on Aging, a nonprofit advocacy organization. “In the past, with the sizable upfront fees, it was only appropriate for people who wanted to stay in their home for the rest of their lives. But now that advice no longer applies to Saver loans.”
The changes come as more baby boomers are resorting to reverse mortgages. For the last decade, borrowers were most commonly in their 70s. But now, borrowers are increasingly in their 60s: more than 5 percent of borrowers in 2009 were 63, compared with just 2 percent 10 years ago, according to Reverse Market Insight, which tracks the industry. While the sheer number of baby boomers eligible can explain part of the increase, the economy is probably forcing many people to resort to these products earlier, John K. Lunde, president of the R.M.I., said.
One of the biggest stumbling blocks for prospective borrowers is typically the hefty upfront fees, which ultimately cut into the amount of cash received. Since the Saver mortgage will practically eliminate the upfront mortgage insurance premium — it will be reduced to 0.01 percent of the home value, from 2 percent — the loan may become more attractive to people with more modest cash needs or who need the money for a shorter time. (Borrowers are still responsible for the lender’s closing and origination fees, though many banks have recently waived some of those charges.)
But there is also a big tradeoff. Though the upfront costs have been reduced, the ongoing monthly insurance premiums will rise drastically: those will total 1.25 percent of the loan balance, up from 0.5 percent. (Since reverse mortgage balances grow over time as interest accrues, these costs will rise over time, too). Meanwhile, Saver loans will generally pay out 10 to 18 percent less than the standard reverse mortgage.
“You have to do the math, but if you are taking out a smaller loan, you will be better off,” said David Certner, legislative policy director at AARP. “But if you are taking out a much larger loan, the cumulative mortgage premium will be significant.”
At the same time, the rules for standard reverse mortgages are changing. The upfront mortgage premium of 2 percent remains, but the ongoing premium will also rise sharply — to 1.25 percent of the outstanding balance — largely because of projected continued weakness in home prices. The extra insurance protects the government if the homes are ultimately sold for less than the mortgage value, since the F.H.A. is required to pay the difference to the lender.
Though the program is charging significantly higher premiums and has also reduced the amount that borrowers can withdraw, lenders are now able to use interest rates as low as 5 percent in their calculations. As a result, many people will be able to withdraw more money than they could before the lower limits, said Peter Bell, president of the National Reverse Mortgage Lenders Association.
For instance, last month, a 66-year-old seeking a standard reverse mortgage — which allows you to withdraw more money than the Saver — could take out only 59.1 percent of the home value. Today, however, he could take out 64.2 percent. The older the borrowers, the more money they can withdraw.
Borrowers can take the money in a variety of ways, including a lump sum, installments or a line of credit, which would allow them to withdraw the money when they needed it, much like a home equity credit line.
Fixed-interest rates are available only on lump sum products, which means borrowers must withdraw all the equity they are eligible for right away and interest begins immediately accruing on the entire balance. For that reason, it may make sense for borrowers who have smaller needs to get a reverse mortgage with an adjustable rate.
Mr. Bell said that the Saver product might become a more direct competitor of the home equity line of credit.
Given the complexity of the product, prospective borrowers must visit with a reverse mortgage counselor who has been certified by the Department of Housing and Urban Development before they submit an application.
“It’s important for people to understand what they are getting into,” Ms. Stucki said, “and to understand that conventional thinking doesn’t apply in a reverse world.”