Category: Reverse Mortgage


CNBC

The lack of income-generating investments these days may force aging Baby Boomers to either put off retirement or adopt riskier strategies to generate higher yields.

Traditional financial planning calls for older workers to move their money into so-called safer investments like bond funds that throw off annual income that they can live on without capital appreciation.

But right now the two-year Treasury[US2YT=XX 0.202 -0.001 (0%) ] yields less than 0.2 percent, while the 10-year Treasury[US10YT=XX 2.162 -0.056 (0%) ] will currently provide an annual yield of a little more than 2 percent. The average annual rate on a three-year bank CD is 0.91 percent, according to Bankrate.com.

Equities may seem just too risky to baby boomers after a decade of two bear markets, a ‘Flash Crash’ and then the unprecedented volatility this month. The S&P 500 has had zero capital appreciation over the last 10 years and just 75 percent of the benchmark’s members pay a dividend, down from 90 percent in the 1980s, according to Bank of America/Merrill Lynch.

“People will be working cradle to grave as this low return environment is expected to be around for awhile,” said Stephen Weiss of Short Hills Capital.

Many blame fellow baby boomer Ben Bernanke, the Federal Reserve chief, for the current state of investment choices. The Fed last week pledged to keep short-term rates near zero until mid-2013.

Bernanke’s intention with this low-yield pledge is to smoke other investors out of short, safe investments. But the opposite is happening, investors of all ages just continue to crowd into these assets on the fear of a global recession, lowering the returns for everybody.

Considering the demographics, this low yield environment couldn’t be coming at a worst time. The percentage of the U.S. population over 65 is expected to double to more than 20 percent between now and 2034, according to the U.S. Census Bureau. For financial planners, the old rule of thumb used to be that a client should put their age in bonds. So those turning 65 years old should be 65 percent invested in bonds.

But Bank of America Merrill Lynch is turning this model on its head a bit. The firm’s quantitative strategist presented this demographic data as a positive for the equity market and for the boomers that stick with the stock market. The combination of cash-rich balance sheets and demand from these retirees will drive more and more companies to pay a dividend, hike payouts and repurchase shares and subsequently, cause their shares to appreciate as well.

“With corporate cash balances at near record levels, cash deployment may be one of the most bullish themes around for equities,” said Savita Subramanian, the firm’s quantitative strategist, in a note Tuesday.

Subramanian points out that this is already happening. More companies are hiking payouts and repurchasing shares this year. By his count, the companies in the S&P 500 following this strategy have returned 5.6 percent or greater this year, outperforming by far the overall index.

If the low rates have pushed investors into anything, it’s been gold [GCCV1 1792.20 7.20 (+0.4%) ], an investment that has long been shunned by financial planners because of its volatile nature and the fact that it provides zero income. For better or worse, this low-return environment may drive investors into more exotic investments.

“You can expect a lot more money to pour into the MLP space as investors look for alternative yield,” said Joshua Brown, money manager and author of ‘The Reformed Broker’ blog.

MLPs, or Master Limited Partnerships, distributes the bulk of its cash flow to shareholders. The partnerships tend to be linked to natural resources like an oil pipeline or real estate.

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The Herald

Where about 98 percent of all reverse mortgages are done through reverse mortgage specialty companies and are insured by the Federal Housing Administration (FHA), a few are done by mortgage companies without the FHA guarantee. These are primarily for homes that need a loan amount over the FHA limit. The interest rate would be higher and the Loan to Value would be lower, but it gets the job done.

Another idea for a “private” reverse mortgage is where a well off family member, i.e. kids, grandkids, etc., does the reverse mortgage and eliminates most of the fees.FHA mortgage insurance is by far the biggest fee. It is 2 percent of the appraised value. If your home value is $200,000.00 mortgage insurance would be $4,000.00. A family member could set up a reverse mortgage. That would reduce fees, increase the equity a parent could use, eliminate the age requirement, and greatly reduce the paperwork. This would give the parents the security they need with no monthly payments, and the lending party would make a good profit after the parents die. This is especially true if the “lender” is also the heir to the property.

If several children are involved, they could set up a limited partnership to do the loan. That way the children could benefit from a “stepped–up basis” when the parents die, meaning the children would not owe capital-gains tax when they sell, says Robert Siefert, a financial planner at Modera wealth Management LLC in Boston.

Another option is to have the family lender set up a line of credit for the parents, backed up by the equity in the home.

Reverse mortgages can also be used with the parent over age 62 in helping a child or grandchild to buy a home. Let’s say the adult child has gone through a period of no employment or other situation that has hurt their credit scores. The situation that caused the bad credit is now cured, but it will take a couple years for them to get their credit back in shape to qualify to buy a home. The parents can do a reverse mortgage to get the money for the child to buy the home. The child then makes monthly payments to the parents until they can qualify to buy the home from the parents.

The safety factor here for the parents is that if the child misses a payment or two, it won’t affect the parents credit because they have no monthly payments to make on the reverse mortgage.

Another advantage here is that the parents can use the payments received from the child to pay the interest and FHA insurance accumulating on the reverse mortgage.

Therefore, the equity in the parents’ home will not go down from the original principal balance. When the child pays them off, they can either pay off their reverse mortgage or leave the mortgage on with the “no monthly payments” and use the money from the child for whatever they want.

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Nems360

No need to panic, financial advisers are saying in the wake of Wells Fargo and Bank of America leaving the reverse mortgage business. Homeowners who have reverse mortgages with those banks have no reason to worry, as the banks will continue to service those loans.
What’s more, homeowners who might be seeking a reverse mortgage will still have at least one large provider — MetLife Bank — and plenty of small independent firms from which to choose.
But though there’s no reason to panic, there are still plenty of questions to be answered. What does Wells Fargo and Bank of America leaving the business mean for the reverse mortgage product and the industry? What does their departure say about the future direction of housing prices in the U.S.? Do Wells Fargo and Bank of America have a crystal ball that others don’t? And what should folks who might need or want reverse mortgage do now or in the future?
By way of background, reverse mortgages are — in the big scheme of things — a relatively new product in the world of retirement income, and there’s much confusion over how they work.

Reverse mortgages
Here’s what the national trade group, the National Reverse Mortgage Lenders Association, says about them: "Reverse mortgages are available to seniors 62 years old and older with significant home equity. They are designed to enable elderly homeowners to borrow against the equity in their homes without having to make monthly payments as is required with a traditional ‘forward’ mortgage or home equity loan. Under a reverse mortgage, funds are advanced to the borrower and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away. Borrowers may draw down funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as they continue to live in the home."
Those who have a reverse mortgage originated by Wells Fargo or Bank of America have no need to worry, said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association. "All current Wells Fargo reverse mortgage borrowers will continue to be serviced and funds made available," Bell said in a statement. Ditto those who had one with Bank of America.
In a statement, Wells Fargo said it was leaving the reverse mortgage business in part because of "unpredictable home values." And Bank of America said in February that the staff and resources used by the operation were needed in other parts of the company.
Experts, however, said Wells Fargo’s departure was less about falling house prices and had more to do reputational risk and the business line’s contribution to company’s revenues and profits. "To really understand what caused Wells Fargo to leave the industry, you also need to understand how small their reverse mortgage division really is," said Colette A. Gray, a senior loan officer and reverse mortgage specialist at Home Safe Reverse Mortgage. "With a 26 percent share of the market and a No. 1 position in the industry, their reverse mortgage division represents only a tiny 1.2 percent of their overall retail volume. The potential damage to their reputation in foreclosing on the comparative few in technical default is overwhelming. It simply isn’t worth the risk to them."

One major bank
With Wells Fargo and Bank of America gone from the business, there will be just one major bank — MetLife Bank, a part of MetLife Inc. — and lots of smaller independent players in the business. "Homeowners interested in a reverse mortgage will still have plenty of providers from which to choose," said Bell. "Wells Fargo’s departure means that a significant portion of market share will be re-distributed among other participants in the reverse mortgage business."
And that redistribution could be good news for providers and customers alike. As one member of a group focused on reverse mortgages on LinkedIn said: "It is a shame that most of ‘the big guys’ are abandoning the reverse product but at least for those who still have outlets to place their loans, perhaps the playing field will become more level again."
And the fact that the providers are small should be of no concern to homeowners seeking a reverse mortgage, said Jeff Lewis, the chairman of Generation Mortgage Company. "The product is government-insured, so consumers should not be concerned about whether their provider is a large institution or not," he said. "Actually, they can continue to expect to get more personalized service from smaller organizations, as they have in the past."

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Zillow Blog

It is no secret that America’s population isn’t getting any younger. In fact, according to a recent Harvard study, the number of people who will be considered “seniors” will increase 35% within the next ten years.

Will these newly-minted seniors be able to take advantage of an FHA reverse mortgage to leverage the equity they have built up in their homes so they can enjoy retirement?

Maybe. Maybe not.

According to at least one HUD official, the FHA insured reverse mortgage is here to stay and has a future as an option for seniors.

But many large lenders who have helped seniors with FHA reverse mortgages in the past, are no longer offering this mortgage product. One large lender who is pulling out even stated in their press release that the FHA reverse mortgage program was designed in a “different economic time” (the reverse mortgage program was originally designed by HUD in 1987).

Reverse Mortgages: What Is Different?

As with the “normal” mortgage market, there have been a substantial number of changes to the FHA reverse mortgage program in the last few years. More recently, at least three of the largest FHA reverse mortgage lenders have decided to discontinue helping seniors get FHA reverse mortgages in part due to reputation risk that a recent HUD opinion may cause.

Why are lenders exiting the reverse mortgage market?

  1. The unpredictability of home values
  2. The difficulty of determining a senior’s abilities to make payments on property taxes and homeowners insurance.

Not many people predicted the dramatic decline in home values – and the new uncertainty of future home values combined with a recent change by HUD in essentially requiring a lender to foreclose on a homeowner with an FHA reverse mortgage should they become delinquent on their property taxes or insurance.

In a recent email after deciding to exit the reverse mortgage business, one Wells Fargo executive articulated the reputation risk lenders hold when property values decline and seniors are having trouble keeping up with even their property taxes and insurance:

“The last straw in our decision was the recent HUD decision to require servicers to initiate foreclosure on the Senior Reverse Mortgage customers [who] could not pay their taxes and insurance,” the email says. “When a product or program creates more reputation risk than value … well … you get the picture.”

Falling property values.  Seniors’ budgets being stretched to the point where they can’t afford to keep up on property taxes and insurance. HUD encouraging foreclosure for homeowners with a FHA insured reverse mortgage if they can’t keep their taxes and insurance current.

It all adds up to lenders exiting the reverse mortgage business.

But probably not forever.

They can always get back in should the environment, trend of property values or HUD guidelines change.

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The New York Times

The nation’s two biggest providers of reverse mortgages are no longer offering the loans, as the economics of the business have come under pressure.

Wells Fargo, the largest provider, said on Thursday that it was leaving the business, following the departure in February of Bank of America [BAC 11.1494 0.3294 (+3.04%) ], the second-largest lender. With the two biggest players gone — together, they accounted for 43 percent of the business, according to Reverse Market Insight — prospective borrowers may find it more difficult to access the mortgages.

Reverse mortgages allow people age 62 and older to tap what may be their biggest asset, their home equity, without having to make any payments. Instead, the bank pays the borrowers, though they continue to be responsible for paying property taxes and homeowner’s insurance.

But the loans have increasingly become a riskier proposition. Banks are not allowed to assess borrowers’ ability to keep up with all their payments, and more borrowers do not have the wherewithal to stay current on their homeowners’ insurance and property taxes, both of which have risen in many parts of the country. At the same time, borrowers have been taking the maximum amount of money available, often using it to pay off any remaining money owed on the home. Yet home prices continue to slide.

“We are on new ground here,” said Franklin Codel, head of national consumer lending at Wells Fargo [WFC 27.80 0.31 (+1.13%) ]. “With house prices falling, you reach a crossover point where they owe more than the house is worth and it creates risk for us as mortgage servicers and for HUD.” He was referring to the Department of Housing and Urban Development, whose Federal Housing Administration arm insures the vast majority of these loans through its Home Equity Conversion Mortgage program.

As a result, banks are seeing a rise in what are known as technical defaults, when homeowners fall behind on their taxes or homeowner’s insurance, both of which are required to avoid foreclosure. According to Reverse Market Insight, about 4 to 5 percent of active reverse mortgages, or 25,000 to 30,000 borrowers, are in default on at least one of those items.

Bank of America, meanwhile, said that declining home values made fewer people eligible for reverse mortgages. So it decided to redeploy at least half of those working on the mortgages to its loan modification division, which has been criticized for failing to help enough homeowners on the brink of foreclosure.

For Wells Fargo, however, the inability to assess borrowers’ financial health was the biggest factor for exiting the business. Anyone over the age of 62 with enough home equity can take out a reverse mortgage, regardless of their other income. The amount of money received is determined by the borrower’s age, the amount of equity in the home and prevailing interest rates.

“We are not allowed, as an originator, to decline anyone,” added Mr. Codel of Wells Fargo. We “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.”

Reverse mortgage borrowers are required to pay premiums for mortgage insurance, which protects the lender if the homes are ultimately sold for less than the mortgage value, since the government is required to pay the difference to the lender. The premium rates were increased last October to account for declining home values (though one sizable upfront mortgage premium was eliminated to make the loans more attractive to certain borrowers).

But lenders are responsible for making tax and insurance payments on behalf of delinquent borrowers until they submit an insurance claim to HUD, at which point the agency would be responsible since it provided the insurance against default.

In January, HUD sent a letter to lenders and reverse mortgage counselors that provided guidance on how to report delinquent loans to the agency, and what steps the lenders could take to get borrowers back on track, like establishing a realistic repayment plan that could be completed in two years or less, or getting a HUD-approved mortgage counselor involved to help come up with a solution. If one cannot be reached, the lenders must begin foreclosure proceedings.

Both Wells Fargo and Bank of America have said they have not foreclosed on any borrowers to date.

The National Reverse Mortgage Lenders Association, the industry group, said it has been working with HUD to come up with procedures that would allow lenders to assess a prospective borrower’s income and expenses, or at least require homeowners to set aside money to pay for taxes and insurance. A spokeswoman for HUD said the guidance is still being drafted.

As it stands now, borrowers are required to see a HUD-approved lender before they can apply for a reverse mortgage. As part of that process, consumers are educated on the nuts and bolts of how the loans work and what their responsibilities are, including that they need to be able to continue to pay taxes, insurance and keep the property in good repair.

“We don’t tell consumers what decision to make, but we do try to give them the tools to make a decision,” said Sue Hunt, director of reverse mortgage counseling at CredAbility, a nonprofit consumer credit counseling agency. She added that their sessions last about an hour and 15 minutes, on average. The counselors also look at the consumer’s budget to see if it is sustainable with the mortgage, as well as what circumstances might arise that could throw the borrower off track.

“Outside factors are affecting people who thought five or six years ago that they were in pretty good shape,” she added. “The world has changed a bit around them.”

In days past, the borrower would get the reverse mortgage, and equity would continue to build, experts said, which would provide borrowers with more options — like refinancing — should they fall on hard times. Declining home values have changed that calculus for both bankers and consumers. Borrowers have not been able to pull out as much money. At the same time, the government has also tightened its withdrawal limits.

There were a total of more than 50,000 reverse mortgages, totaling $12.66 billion, made industry wide since last October, according to HUD.

Both Wells Fargo and Bank of America will continue to service their existing reverse mortgages. And the reverse mortgage association has said it will work with its members to ensure that senior citizens who need the loans can get them, though some experts said that less competition could increase certain fees.

“There is a certain amount of the business done by Wells and Bank of America that happens because of their bank branches, brand names and large sales forces,” said John K. Lunde, president of Reverse Market Insight. “We would expect something more than half of their volume to be absorbed by the rest of the industry, with something less than half not happening.”

Wells Fargo, which said that reverse mortgages represented 2.2 percent of its retail mortgage business, employs about 1,000 reverse mortgage workers. They are being given a chance to find other positions at the bank. Bank of America said that about half of its 600 workers have been reassigned within the bank. MetLife, the third-largest provider of reverse mortgages, declined to comment on its business.

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The Herald Review

On any regular purchase or refinance mortgage, the main reason people get foreclosed on is they get too far behind in their monthly payments. With a reverse mortgage there are no monthly payments. Therefore any possible foreclosure must occur for another reason.

The cause of most reverse mortgage foreclosures is non payment of property taxes. Taxes and homeowners insurance payments are paid by the home owner in a reverse mortgage. Usually in a regular mortgage, the taxes and insurance payments are included with the monthly mortgage payment. Now, you can have your reverse mortgage company pay them for you also, but they do it by holding back money you would receive at closing. You would need to specify the number of years you want them to pay it and that’s how much they would hold back.

If you start to get behind in your taxes, that triggers other things for your mortgage company to check, such as, do you really still live there? Has the house been satisfactorily maintained?

In the closing papers at the title company you will be asked to sign a document stating that you will maintain the home and live in it as your primary residence.

If the lender finds a reason to foreclose, the borrower has a right to be reinstated. This right applies even after foreclosure proceedings have been started. To reinstate, the borrower shall correct the condition which resulted in the requirement for foreclosure. Foreclosure costs would be added to the principal balance.

Other required signatures at closing are on documents stating: 1) You will not participate in a real estate tax deferral program. 2) You will not put any other liens (credit lines, 2nd mortgages, etc) on your property. 3) You will not change the property in any way that would reduce its value. 4) You will pay any governmental or municipal surcharges (i.e., sewer, water, or other city provided utility improvements).

Lastly, a borrower would be in default and foreclosure could result, if it was discovered that during the loan application process, false or inaccurate information was given.

Because the non payment of taxes and insurance is the most prevalent cause of foreclosure in reverse mortgages, HUD is now indicating it will require checking credit scores and income verification in the future to make sure people are credit worthy and have enough income to pay the required taxes and insurance. As of now, credit scores and income verification are not considered in a reverse mortgage. Therefore, I would suggest that if you are contemplating a reverse mortgage in the near future that you consider doing it now before these new regulations become effective.

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Reverse Mortgage Daily

 

A common frustration exists among reverse mortgage professionals when it comes to equipping potential borrowers with good, accurate information about their products.

It isn’t that borrowers aren’t open to learning about the loans, but they sometimes come to the table already having been turned off by news articles or misinformation presented by mainstream media or political figures. While they are small in number compared with the major media networks reaching millions across the nation, lenders and originators agree it is essential to work toward changing the false notions out there—one borrower, newscaster and politician at a time.

“Misinformation and disinformation are hurting our industry and the borrowers we would otherwise be helping who are not considering our product because of fear,” says Jeff Lewis, founding member of the Coalition for Independent Seniors and chairman of Generation Mortgage. “We need to counter the negative press, negative statements by advocates and politicians as well. If we don’t, who will?”

The timing of the housing crisis and financial meltdown hasn’t helped, says George Downey, founder of Braintree, Mass-based Harbor Mortgage Inc. “The preponderance of the press has been negative in the wake of the mortgage meltdown and subprime crisis. Unfortunately, many articles have been writing with misinformation and a rehash of old information that has already been printed. It has a similar effect on regulators and legislators.”

A recent National Reverse Mortgage Lenders Association study aims to provide an accurate response of current reverse mortgage borrowers, as well as the response from potential borrowers and their children. The results of the survey, Downey says, are overwhelmingly positive, with a more than 90% reporting satisfaction of the loans. Using the NRMLA study and other positive information is one way to address the inaccuracies surrounding the product.

“Collectively, the industry is constantly trying to disseminate good information. If there are 1000 media outlets and one NRMLA, how many times can the association respond? We’re better off to keep educating on the right information rather than trying to fight misinformation,” says Michael Gruley of 1st Financial Reverse Mortgages..

But drawing attention to the negative press can be an unwanted result whenever the question of misinformation comes up.

“We don’t wrestle with the pig,” says Gruley. “We try to correct errors, but the more we engage ourselves in trying to correct, the more we shine light on it.”

Downey says he engages potential borrowers, instead, and asks them about misinformation about the product when he encounters it.

“In talking with people who have these [negative] feelings, I think the better response is, ‘That’s interesting. Why do you say that?’ Then draw them out as to what it is that led them to that conclusion. What I find out almost 100% of the time, is they don’t have specific facts, or they have misconceptions. Generally speaking, it’s what they heard somebody else say.”

The hope is that when reverse mortgages become more mainstream, the education will become easier.

“We believe seniors are starting to ignore it,” Gruley says. “I suppose, in time, we have to hope the truth will prevail rather than fight all the naysayers.”

“One day, this will be a mainstream product, but it isn’t right now,” says Downey.

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