The fate of reverse mortgages, now that some baby boomers are retiring and could need them, might seem to be in question.
The largest reverse mortgage players-Bank of America, Wells Fargo and Financial Freedom-have exited the market, along with government-seized Fannie Mae. The White House Office of Management and Budget over the last two years has cut the "principal limit," or percentage of the value of a home that governs the amount a senior can get on a reverse mortgage.
This is leading many borrowers, with already declining home values, to qualify for less money-if they qualify. Moreover, some 10,000 to 15,000 reverse mortgage borrowers are in "technical default," estimates Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA), in Washington, D.C. Often, this is because of their inability to maintain payments on taxes and/or home owner's insurance-the conditions for maintaining a reverse mortgage. In some cases, the home owner died and the family declined to repay the loan.
"The last [reverse mortgage] I referred was probably three or four years ago," says Judith N. Sanborn, a fee-based Altamonte Springs, Fla.-based CFP licensee. "When property values were so overstated, people were getting reverse mortgages to do other types of investments."
Yet reverse mortgages may be the last ray of hope for many senior citizens short on retirement cash. Instead of making monthly mortgage payments to a lender, a senior can obtain a loan, a credit line or a combination of both, based on the equity of a home.
Generally, reverse mortgages are limited to persons at least 62 years old. They operate much like a home equity loan or home equity credit line. But unlike many home equity products, a reverse mortgage does not consider a person's credit history or income. Plus, the loans typically need only be repaid, with accrued interest, if a home owner moves, sells the home or dies.
Most reverse mortgages are guaranteed by the U.S. Department of Housing and Urban Development Federal Housing Administration through mortgage insurance premiums charged to the borrower. The amount a borrower traditionally gets depends on the borrower's age, the amount of equity in the home and interest rates.
In addition to traditional closing costs, a standard HUD home equity conversion mortgage (HECM) charges an origination fee, a mortgage insurance premium and an up-front "servicing set-aside," which is money deducted from the loan limit to cover the monthly costs of servicing the loan.
Bell, of the National Reverse Mortgage Lenders Association, acknowledges that the annual mortgage insurance premium charged to a borrower was raised to 1.25% of the outstanding balance this year from 0.5%. However, he adds, origination fees, capped at $6,000, are dropping because of competition.
Although most reverse mortgages historically have had variable rates, often based on the LIBOR, they have trended to fixed rates in recent years. As the LIBOR (London Interbank Offered Rate) recently dropped, though, adjustable rates have regained favor.
Experts say the amount a person gets from a reverse mortgage is based on an expected interest rate. Lower is better. The expected fixed-rate threshold at this writing was running 5.06% under the HUD formula.