Introducing the Kosher HECM Reverse Mortgage

The kosher stamp on a food means that it has been certified as fit for human consumption. We have long needed a comparable certification process applicable to financial instruments sold to consumers, with the need most pronounced for the more complex instruments. HECM reverse mortgages are at the top of that list. They are extremely complex, and markedly different from the standard mortgages that many seniors learned about when they took one earlier in their lives to purchase homes.

This article summarizes the dysfunctional features of the existing non-kosher market, and describes the major features of the kosher version.

Existing Market Failure

The mainstream HECM market is the most dysfunctional of all the major financial service markets. Lenders don't display their prices anywhere, and borrowers don't price shop. Most originators always charge the maximum origination fee allowed by law, regardless of how much they are making on the transaction. Markups are 2.5 to 3 times larger than in the standard mortgage market, though the work load is much the same. The details are set out in my Wharton working paper HECM Reverse Mortgages: Is Market Failure Fixable?

The Kosher HECM is designed to maximize the benefits a senior receives from a reverse mortgage, and avoid the hazards inherent in a very complicated transaction. The following are its major features as compared to the non-kosher alternatives.

Features of the Kosher HECM

Optimizing the Selection of HECM Options With the Kosher Calculator: A major positive feature of HECMs is the wide range of options available to seniors for withdrawing funds. They can draw cash up front, get a monthly payment for a specified period, take a credit line, or combinations of two or three of these. In addition, they can alter these combinations in the future. But this introduces enormous complexity, and a danger that the borrower may make poor choices.

To reduce this risk, we created a free Kosher HECM calculator that allows a senior to see exactly what the options are in the sense of, e.g., "If I take less of this, how much more can I draw of that?" The calculator determines option amounts using the lowest of the competitive prices posted by participating lenders. It also shows the combination of interest rate and origination fee that generates the lowest cost over the borrower's time horizon. In addition, the calculator shows the changes in the senior's future finances that would result from any combination of draw options taken now.

The Non-Kosher Alternative: No existing calculator shows users the tradeoffs between different draw options, or the consequences for their future finances. Part of my game plan is an offer to license and maintain the Kosher HECM calculator at no charge for HUD, the Consumer Financial Protection Bureau, and perhaps others.

Optimizing the Selection of HECM Options With Disinterested Option Experts: Because not all seniors can navigate the Kosher HECM calculator on their own, we have created a group of "option experts" to offer seniors free and disinterested help in assessing Kosher HECM options when they are in an exploration stage. In addition to my staff, the option experts are a select group of reverse mortgage brokers and loan officers who are proficient in the use of the calculator, who will advise on how best to integrate an HECM into a longer-range retirement plan, and who provide their services pro bono.

Seniors are assigned to an expert who is not licensed to originate loans in the senior's state. This eliminates any financial inducement to steer a senior in one or another direction. The experts have no financial interest in whether or not the senior ends up with a HECM.

The Non-Kosher Alternative: Draw option decisions are often made haphazardly, usually to meet pressing financial needs. There are no financial tools that balance one type of draw against others or project results over future years.

see more: http://www.huffingtonpost.com/jack-m-guttentag/introducing-the-kosher-he_b_8096962.html

There Are Actually 3 Types of Reverse Mortgages

If you are considering taking out a reverse mortgage home loan, there are three different types to consider. We'll give you the details so you can better decide which one is right for you.


Home Equity Conversion Mortgage (HECM)

The most popular of the three reverse mortgage types is the Home Equity Conversion Mortgage (HECM). This is considered the most commonly issued loan of this type, according to the HUD. One reason: it often comes with lower rates and lesser fees than those that would be offered by private lenders. In addition, the FHA backs these loans, making them a more lucrative option for the banks that issue them.

Qualifications include:
You have to be at least 62 years old.
You have equity on your home.
Your home must meet certain building requirements.
You must have undergone reverse mortgage counseling.
There are no income or credit requirements.
Since these loans are FHA backed, they do have some conditions that must be met. These include:
There are loan limits, and the loan can't exceed 100% of the home's value.
A Mortgage Insurance Premium (MIP) is required for all HECM reverse equity loans.
Reverse Annuity and Home Equity Conversion Mortgages
The other option that you have is with reverse annuity and home equity conversion mortgages. A reverse annuity mortgage comprises an agreement between the lender and the homeowner, where the homeowner borrows against existing equity in the home. The money borrowed has to be repaid only when the home is refinanced or is sold. While reverse annuity mortgages do have three different classes, the most common is the Home Equity Conversion Mortgages (HECM) because it's backed by the FHA.

Private Company Reverse Mortgage

It is possible to get a non-FHA backed loan of this type, commonly referred to as a private company reverse mortgage. But these types of mortgages are typically based upon income and credit score as well as existing home equity, since they are privately backed, and can often come with higher interest rates and more fees because they are offered by private lenders.

If you are considering a reverse mortgage loan, make sure you take the time to research all of your options. You will likely arrive at the conclusion that an HECM loan is the best suited for your needs, namely due to how lucrative they are in comparison to your other borrowing options.

see more: http://www.huffingtonpost.com/michael-lazar/there-are-actually-3-types-of-reverse-mortgages_b_7976494.html

Sunshine State Spotlight: Rise In Reverse Mortgages Set Example For The Rest Of The Country

With the economy recovering from the Great Recession and home values rising in Florida, Donna Linton says all of this is paving the way for more people in her home state to turn to reverse mortgages, including those who want to use them to take their dream vacations.

Linton, a loan originator with Sterling Mortgage Services in Stuart, about 100 miles north of Miami, says a rebound in the local housing market has helped with people turning back to reverse mortgages in the Sunshine State.

"It's picking up, definitely getting better," Linton says. "When home appraisals were down, it was difficult. People interested in getting reverse mortgages don't want to hear that their homes aren't worth what they think they are. Now, that is turning around, and the appraisals are even higher than the estimates I am putting down."

With that untapped potential in their homes being revealed, those seeking a reverse mortgage in her region appear to be younger these days than in the past, with many in their late 60s and early 70s, Linton says. She's not seeing as many older clients in their 80s.

"It's people that just need a little more income or maybe want to have some more money to do more things they don't quite have enough money to do without it, like take a vacation - people like cruises," Linton says. "It's a little more money to enjoy their retirement with."

Linton says her focus is to get more financial advisors and real estate agents interested in getting their clients to consider reverse mortgages. That's an untapped market that's going to help the industry grow, she says.

There are many people who don't want to dip into their stock portfolios or investments or want to maximize their Social Security benefits by waiting until they're age 70 to take them, thus increasing their benefits by 32 percent a month. But they might need extra money to get them there - and a reverse mortgage can bridge that gap.

"A line of credit can be a lucrative thing," Linton says. "It's a very good tool for financial advisors to use if they will take the time to study it. They will understand it will not be a detriment to their client but help them. If they have to sell stocks in a down market, why would they want to do that. If they want to take it from an investment, there might be a penalty. With a reverse mortgage, the money is in a line of credit, and they can draw on that instead. It's a better idea."

The other opportunity is getting realtors interested in the concept, Linton says. There's a lot of opportunity, especially in markets like Florida, for people to use a HECM For Purchase, like this couple did to buy their dream home.

"They look at me like I have four heads, mostly because they are uninformed or don't understand now it works," Linton says.

Many people are coming down to Florida after selling their homes in the Midwest or Northeast and have cash to put down, Linton says. Some are choosing to buy a small condo without realizing they can use a reverse mortgage to buy something a lot bigger than they thought they could otherwise. All they have to do is put 50 percent down, and a reverse mortgage will cover the rest without anymore mortgage payments, she says.

"You can have a lot more home than you thought you could. It just makes a lot of sense, but people don't understand how it works," Linton says. "I'm working on changing that."

Federal regulatory changes about the use of reverse mortgages has helped reduce the skepticism and negativity that some people and advisors have had for their use, Linton says. For example, doing a financial assessment on the borrower will help, because about 10 percent of reverse mortgages were going into foreclosure because people couldn't afford to pay their taxes and insurance, Linton says. They were living on Social Security, taking out loans and using up the money.

"They couldn't afford those payments and unfortunately when you have people 70 and 80 years old that you're going to have to foreclose on, that's not a good situation," Linton says. "But now it will be much better that we will know for sure that these people are able to afford to keep up their payments and go forward with their reverse mortgages. It will be a much better situation for them."

see more: http://www.huffingtonpost.com/buck-wargo/sunshine-state-spotlight-_b_7942566.html

Should You Consider a Reverse Mortgage?

As financial devices, reverse mortgages (RMs) are like 3-D printers. They can do some interesting and useful things, but they are complex and can be expensive.

Reverse mortgages were originally designed for those who came up a little short when they reached retirement age. Today, however, they are being used for purposes other than just retirement income.

Should you consider a reverse mortgage? Read on to learn about what they are, how you can use them, what they cost, and their drawbacks.

What They Are
Unlike traditional mortgages, which require a monthly payment to pay off principal and interest, RMs tap the equity in your primary residence to provide you a monthly payment or lump sum. You can take out an RM on a home you've been living in for a long while, or one you're buying. It's a loan that uses your home as collateral. You defer paying off the loan until you move out, sell, or die.

As products that didn't exist before 1990, RMs are relative newcomers to the home-finance world. Their volume has grown from less than 200 loans some 25 years ago to more than 51,000 last year. The biggest year was 2009, when more than 114,000 RMs were originated, according to the U.S. Department of Housing and Urban Development (HUD), which insures the loans through its Federal Housing Administration. Although the current market for RMs is relatively small--only about 3% of those who qualify have them--they are expected to grow in popularity as baby boomers age.

The first RMs, also known as Home Equity Conversion Mortgages, were variable-rate products that adjusted monthly. HUD capped their volume until 1998, when the government allowed 150,000 RMs to be issued annually. Their popularity boomed immediately before and after the housing boom (2006-11), as more homeowners tapped their equity for a variety of purposes.

The housing bust, which resulted from the popping of a credit bubble in 2007, forced some RM holders into difficult financial situations, which were compounded by job losses and a recession. Some 10% of reverse-mortgage holders faced defaults when they were unable to pay property tax or insurance bills.

see more: http://news.morningstar.com/articlenet/article.aspx?id=709015