In one television commercial, actor Robert Wagner beckons viewers to call for a video on reverse mortgages. The sponsor of the national television spot, Vertical Lend Inc., a Melville, N.Y. mortgage banker, markets reverse mortgages through financial advisors.
Reverse mortgages may be one of the only categories of mortgages not blind-sided by the housing market downturn. Reason: Many of the 78 million baby boomers are marching toward retirement with inadequate savings. Some see reverse mortgages as the one thing that might bail them out.
A reverse mortgage is like a home equity loan in that it's a loan secured by a home. The differences: A borrower never has to repay the loan until he or she moves, sells the home or dies. Upon the death of the last surviving borrower, the home may be sold and the loan repaid from the estate. The amount owed can never exceed the value of the home. Unlike a home equity loan, a borrower needs no income to qualify for a reverse mortgage.
Through Vertical Lend's "Senior Lending Network," some 2,000 financial professionals become part-time employees of Vertical Lend. They earn a commission of 50% of the origination fee on products they sell to their clients.
It wasn't long ago that reverse mortgages were heavily criticized as too complex and a hard sell to Depression-era seniors. But now experts say financial advisors who are not up to speed on reverse mortgages could lose clients. Besides a growing need for reverse mortgages by cash-strapped retirees, catalysts cited for their popularity among lenders include:
Government-backed Ginnie Mae began securitizing Federal Housing Administration reverse mortgages on September 1. So Wall Street firms are salivating for triple-A-rated, government-backed bonds.
The largest mortgage players, including Wells Fargo, Bank of America and Countrywide Financial, now offer reverse mortgages. The added competition is increasing the array of products and the amounts home owners can borrow and it is lowering prices.
"If you called me six months ago and asked me how many [reverse mortgage] products are in the marketplace, I would have told you three," Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington, D.C., said recently. "Today, it's 18 to 20 and growing."
How much a client can borrow on a reverse mortgage depends on his or her age, home value and current interest rates. Generally, the older the homeowner is and the more the house is worth, the higher the amount that can be borrowed.
At this writing, reverse mortgage borrowers typically were required to be at least 62 years old. With no monthly payments required by the borrower, the loan principal, complete with accompanying interest and fees, may accumulate. A reverse mortgage may be in the form of an immediate cash advance, a credit line, a monthly cash advance for a specific term or a combination of formats.
The largest issuer of reverse mortgages long has been the U.S. Department of Housing and Urban Development's Federal Housing Administration. It originated 107,558 reverse mortgages-the overwhelming majority of U.S. reverse mortgage volume-in its 2007 fiscal year, more than the 76,351 originated in 2006. To date, a major deterrent to reverse mortgages has been their high cost and the limited amounts for which borrowers may qualify, but more private programs with larger loan limits are debuting. The most popular FHA product, known as a home equity conversion mortgage (HECM), has maximum loan limits ranging from only $200,160 to $362,790, based on the median home price in a geographic area.
But HUD, thanks to the FHA Modernization Act in Congress, was expected to issue a larger, flat national limit of $417,000-perhaps by the time you read this article.
Reverse mortgages generally have a 2% insurance fee and a 2% origination cost, as well as standard $2,000 to $3,000 third-party closing costs. They usually have a variable interest rate, with periodic and lifetime caps. Like adjustable-rate mortgages or home equity lines, interest rates often fluctuate based on a published index. Commonly used is the constant Treasury maturity yield or LIBOR, plus a spread.
Besides "jumbo" reverse mortgages, or loans larger than the HUD limits, fixed-rate programs and reverse mortgages for second homes have debuted.
Last summer, lenders in some markets cut spreads over published reverse mortgage Treasury indexes, but some, in view of the more recent credit crunch, raised them again. Vertical Lend, which was recently acquired by KBC Group NV, a Belgian banking company, introduced a reverse mortgage tied to the LIBOR (London Interbank Offered Rate). The more volatile index, according to David Peskin, Vertical Lend chief executive officer, cuts a lender's interest rate risk while allowing for a lower, more competitive spread.
Another critical change has been the uses for reverse mortgages. Historically, they were for poor seniors who were short on cash or unable to afford home repairs.
Today, Peskin says, there are also "wants-based" borrowers reflecting the lower-end financial professional client. These people have some money, but are fearful of tapping a nest egg. Another category: sophisticated, wealthier clients, those concerned about long-term planning, long-term care and life insurance.
Reverse mortgages also have been suggested as a way to finance long-term care insurance-often for five years, which is the Medicaid "look-back" period during which gifts can delay a person's eligibility.
Leah Auricchio, a certified public accountant and state director of reverse mortgage lending in the Houston office of First Reverse Financial Services LLC in Westmont, Ill., has seen at least one financial advisor gain a client because of a reverse mortgage.
"I did a very large jumbo reverse mortgage a few months ago," says Auricchio, whose company is a subsidiary of Family Federal Savings of Cicero, Ill. One financial planner proposed the reverse mortgage as part of a longer-term plan to leverage the client's assets; a second advisor didn't. The advisor using the reverse mortgage got the business.
Reverse mortgages can provide an alternative to clients who prefer not to take taxable IRA distributions.
The proceeds of a reverse mortgage are not taxable, but traditional IRA distributions are, Auricchio explains. If a client has an IRA, he or she can put the IRA into a stretch IRA and leave it to the next generation. Clients also can use a reverse mortgage to help fund a 529 college savings plans, from which withdrawals are tax-free for educational expenses.
Boston elder law attorney John Gosselin suggests bracing for more reverse mortgage twists.
Mortgage companies, forming pools, are creating wholesale reverse mortgage products and expanding underwriting guidelines, he says. Persons younger than 62 will soon qualify. Look for reverse mortgages that will allow for, say, home improvement loans, in addition to a first mortgage on the property. Also, expect smaller reverse mortgages for car loans. Another program, already available through Virgin Group PLC affiliate CircleLending in Waltham, Mass., lets family and friends issue private reverse mortgages to each other. In addition, costly reverse mortgage insurance premiums are expected to disappear or be drastically cut.
"Originators aren't getting the spreads they used to get (on mortgages)," Gosselin says. "They're looking for the next product."
If your client is considering a reverse mortgage, the FHA Home Equity Conversion Mortgage has long been by far the best deal. It's the lowest-cost, and often provides the most money. It also has the benefit of a U.S. government guarantee. "Other reverse mortgages may have smaller fees, but they generally have higher interest rates," says the AARP, which at www.aarp.org/revmort provides comprehensive, objective information on reverse mortgages.
However, reverse mortgages are still new and relatively untested. Plus, financial advisors need to be mindful of state laws, which may require registration to sell a reverse mortgage. Another requirement with the FHA program, as well as with reverse mortgages in many states, is that anyone taking one out must undergo a counseling session with a HUD-approved counseling agency before signing. These sessions, which may be conducted over the telephone, include an analysis of reverse mortgages, including payment plans, costs and alternatives. You can locate a free or low-cost counseling agency at www.hud.gov.
But it's not only HUD borrowers that must go for a counseling session before obtaining a reverse mortgage. All reverse mortgage lenders today currently require borrowers to undergo counseling, Bell says. Effective last January 1, California Senate Bill 1609, spearheaded by state Sen. S. Joseph Simitian (D-Palo Alto), officially made counseling for any reverse mortgage a requirement under California law. The law also requires lenders to prepare loan documents in the language in which the reverse mortgage was negotiated, and prohibits lenders from requiring a borrower to purchase an annuity as a condition of the loan.
Simitian's office says it believes that North Carolina, Hawaii, Minnesota and Tennessee have similar rules.
Reverse mortgages may pose special concerns to couples. For example, a married couple may qualify for more money if the older spouse is the exclusive borrower of the reverse mortgage. The problem is that if he or she dies or goes into a nursing home, the other spouse may be required to repay the loan, jeopardizing the home and/or their financial security, Gosselin says. On the other hand, if one spouse is younger than 62 and can't qualify for a reverse mortgage, he or she may have to give up an interest in the property. This scenario, common with second marriages, can be a sticky wicket.
These issues are not specifically covered in HUD counseling sessions, but inquisitive clients are referred for additional guidance, a HUD spokesman says.
"People shouldn't be taking big lump sums out of reverses," Gosselin warns. This can present several traps, including disqualifying the borrower from Supplemental Security Income or public assistance.
So what should you consider if your client comes to you about a reverse mortgage?
Check to see if there are any special plans available through state or local housing agencies. If not, see if your client qualifies for the FHA reverse mortgage program. Compare reverse mortgage pricing, much as you would a standard mortgage.
Make certain your client does business with a lender you know will always be around. Auricchio suggests using one of the 8,600 "FHA approved" lenders, which must meet higher standards to gain that designation.
See if your client can wait. Experts say the older you are when you take out a reverse mortgage, the cheaper it will likely be.
Consult an elder law attorney (one can be found at www.naela.org or www.nelf.org). Make sure clients consider the impact of reverse mortgages on Medicaid planning and/or estate planning.
Carefully examine costs. A home equity credit line may prove cheaper, notes Christopher Zehnder, a CFP and former mortgage banker in St. Cloud, Fla.
Beware of mortgage salespersons, who may omit information.
Consider whether a reverse mortgage is suitable for the client and how it will impact heirs.
Review senior protection rules in your state. "The average person who gets a reverse mortgage is a 77-year-old widow," Gosselin says. "A lot are not sophisticated, and they're unable to evaluate differences in products. Some have early dementia."