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Reverse Mortgages—The Next Hot Spot?

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Reverse Mortgages—The Next Hot Spot? LINKING LENDERS AND COMMUNITIES SPRING 2008 PUBLISHED QUARTERLY BY THE COMMUNITY AFFAIRS DEPARTMENT OF THE FEDERAL RESERVE BANK OF ST. LOUIS BRIDGES www.stlouisfed.org X Exploring Teaching What’s in Your Credit File? Innovation in DE Teens about 6 Community N Entrepreneurship An IDA for Youth on Their Own I 4 8 Development Reverse Mortgages—the Next Hot Spot? By Heidi Kaplan According to the National Senior Community Affairs Analyst Council on Aging, the develop- Board of Governors ment of the reverse mortgage Federal Reserve System is an important tool for seniors intending to live at home as reverse mortgage is a they grow older, also known special type of home as “aging in place.” These A loan that allows eli- loans can provide seniors with gible homeowners to convert a vital income for home mainte- portion of their home’s equity nance, taxes and health care. into cash. Despite recent Some older adults use reverse troubles in the national mort- mortgages for indulgences such gage market, reverse mortgages as a second car, family gifts or are growing at a rapid rate. lavish vacations. Expansion of this hot spot in The American Association for mortgage lending is expected Retired Persons also supports to continue with increasingly reverse mortgages as a valid flexible products, new sources financial option, but urges of capital and a growing supply borrowers to carefully consider of potential borrowers. As the Reverse mortgages are row against their home equity whether the reverse mortgage is reverse mortgage market devel- characterized by the payment to create a tax-free source of the correct product to meet their ops, it is important that poten- flow: Rather than making income while they continue needs. To that end, borrowers tial borrowers are educated mortgage payments, the bor- living in their home. Borrow- should determine whether there about this complex product to rower receives cash from the ers have no monthly repayment are less costly options to access protect them from taking out lender. A reverse mortgage obligation until the home is no unsuitable loans. enables senior citizens to bor- longer their primary residence. continued on Page 2 Reverse Mortgages HECM and Home Keeper are requirements; greater princi- lenders and consumers. As continued from Page 1 adjustable rate mortgages. Fees pal amounts, including jumbo noted, the reverse mortgage for these products include clos- reverse mortgages; more flex- can enable older adults to “age needed cash, make a long-term ing costs, a monthly servicing ible rate structures, including in place” on a fixed income. As plan for managing assets, and fee and, for HECM, an insur- fixed rates; and lower fees. the industry grows, consumer develop a clear understanding ance fee. For both products, However, the majority of new interest will potentially be of the reverse mortgage product. the loan principal increases products do not include mort- driven by the increase in prod- with each payment, as inter- gage insurance. uct options, including jumbo The Reverse Mortgage Explained est and other charges accrued loans, fixed rates and more The reverse mortgage market are rolled into the total funds Growth in the Market flexible eligibility options. Fur- is dominated by the Home advanced to the borrower. The introduction of reverse thermore, the growing number Equity Conversion Mortgage Borrowers are not required to mortgages was marked by a of reverse mortgage lenders has (HECM), a product admin- repay a reverse mortgage until period of very slow growth brought increased competi- istered by the Department of a “maturity” event, namely the from 1990 to 2002, followed by tion to the industry, which is Housing and Urban Develop- death of the borrower, sale of exponential growth in recent resulting in lower pricing and ment (HUD) and insured by the property or violation of the years. Reverse mortgages additional product innovation. HUD’s Federal Housing Admin- mortgage agreement. Although represent only 1 percent of Consumer growth in the istration (FHA). HECM loans borrowers are not required to the overall mortgage-lending reverse mortgage market is are originated by private lenders make payments until they no market, but these loans are expected to continue rapidly and purchased by Fannie Mae. longer inhabit the home, they expected to expand by as much due to national demographic With 90 percent of the reverse are required to maintain the as tenfold in the next 20 years. changes. Today, there is mortgage share, HECM has property, pay property taxes According to HUD, since 1990, already an estimated $4.3 tril- led this market since becom- and pay the home insurance. senior citizens have taken out lion in home equity held by ing active in 1989. In 1995, Borrowers and lenders are more than 308,000 HECMs, Americans age 62 and over. As Fannie Mae introduced the protected from payment risk which represent nearly 90 baby boomers quickly become initial HECM competitor with a with both HECM and Home percent of the reverse mortgage age-eligible, this number will proprietary product known as Keeper loans. HECM loans market. And, between 2000 increase dramatically. the Home Keeper Mortgage. carry FHA insurance that and 2006 alone, there has been Lenders’ interest in the HECM and Home Keeper ensures that the borrowers a tenfold increase in the num- reverse mortgage market also share characteristics that have will receive all payments due ber of HECMs. is increasing as additional defined the reverse mortgage and the lender will receive full More recently, bigger players capital becomes available from market to date. Both products repayment of the loan balance. in the mortgage market have the development of a second- require borrowers to be at Fannie Mae guarantees Home gained interest in reverse mort- ary market. An established least 62 years old and have a Keeper loans. gages. As a result, the latest secondary market for reverse substantial amount of equity in Despite the dominance of growth in the reverse mortgage mortgages would provide their principal residence. Each HECM, proprietary products market has occurred across increased liquidity and could product uses a formula to deter- have been entering the reverse products, with new propri- broaden the lender distribu- mine the maximum amount mortgage market. In 1999, etary products slowly pilfering tion channels and expand the of principal a homeowner can Financial Freedom Senior market share from the estab- investor base. Securitizing borrow. Neither product sup- Funding Corp., a subsidiary of lished HECM market. Overall, these products is complicated, ports “jumbo loans,” loans that IndyMac Bank of F.S.B, intro- approximately 90,000 reverse but the market is slowly adopt- exceed $417,000. duced the first private-sector mortgages, totaling $10 billion ing techniques to do so. Borrowers can draw down reverse mortgage, known as in loans, were originated in In 2006, the Lehman Brothers payments in monthly install- the Cash Account. 2006, doubling the number issued the first HECM-backed ments, lump sums, lines of The onset of new products from 2005. securities to investors. Later credit or a combination of is bringing more consumer Interest in reverse mortgages that same year, Ginnie Mae these options. options, including lower age continues to grow by both announced that the organization LINKING LENDERS #2 AND COMMUNITIES is in the process of creating a counseling options have faced HECM securitization program. some challenges. With its new program, Ginnie First, the quality of the Where To Find Information Mae intends to deepen the avail- reverse mortgage counseling A number of reputable organizations with information ability of HECM lending, create available appears to vary greatly. on reverse mortgages are available. The following a broader secondary market for HUD-certified counselors and web sites were used as sources for the accompanying HECM loans, reduce the costs to their counterparts face differ- article and are a good place to begin a reverse mort- borrowers and broaden options ent standards for counseling. gage investigation. available to lenders and home- HUD-approved agencies are, at owners. Private investors are a minimum, required to focus American Association for Retired Persons anticipated to be players in the on product suitability for the www.aarp.org/money/revmort reverse mortgage securitization borrower and the possible alter- Fannie Mae market in the near future. natives. But even within this www.fanniemae.com/homebuyers/findamortgage/ certified circle, there is still a reverse/index.jhtml Consumer Protection great deal of variety, as counsel- Mortgage Bankers Association Reverse mortgages are a ing may be offered by video, www.mortgagebankers.org new and complicated financial telephone or in person, and National Council on Aging product that are being offered sessions may range from www.ncoa.org/content.cfm?sectionID=321&detail=1795 at an increasing rate to the 10 minutes to two hours. National Reverse Mortgage Lenders Association nation’s seniors. With a grow- Second, counseling has been www.reversemortgage.org ing number of products offering a troublesome issue from time a variety of rate structures and to time due to a lack of avail- Department of Housing and Urban Development www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm features, it is increasingly diffi- able counselors in some loca- cult for borrowers to determine tions, particularly those areas which reverse mortgage, if any, with an increased volume of is a suitable financial option. reverse mortgages. Currently, Furthermore, most people lack the need to train counselors familiarity with the reverse who specialize in reverse mort- mortgage market, leaving eligi- gages is competing with the ble borrowers exposed to loans national surge in training for that they might not understand foreclosure counseling. or that might not be appropri- Third, anecdotal evidence ate for their needs. suggests that there is an Accordingly, it is critical that increase in predatory lending potential borrowers of reverse practices around reverse mort- mortgages get adequate informa- gages.
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