REVERSE MORTGAGES MEAN OPPORTUNITIES—AND OBSTACLES—FOR LENDERS
As the baby boomer generation approaches retirement age, many are looking for ways to increase their cash flow to supplement their retirement incomes. As a result, reverse mortgages have been growing in popularity over recent years.
Reverse mortgages are a type of non-recourse loan that utilize the equity in a borrower’s primary residence to provide them with cash, monthly payments, or a combination of the two. Reverse mortgages are typically only available to borrowers over 62 years of age and on homes that are completely, or nearly, paid off.
In addition, reverse mortgages never need to be paid off until a preset condition has come to pass—such as the death of the borrower, sale of the house, or the borrower no longer using the house as his primary residence. Because the borrower does not have to repay the loan, there is no danger of the borrower defaulting for failure to pay. However, the borrower can default under certain other circumstances, such as failure to maintain the premises or permitting a senior lien to attach to the premises.
Types of Reverse Mortgages
The granddaddy of reverse mortgage programs is the Fannie Mae HomeKeeper program. For a while, it was the most popular reverse mortgages product on the market. In recent years, however, the popularity of Fannie Mae’s product has declined while that of HUD’s Home Equity Conversion Mortgage (HECM) has risen. Today, approximately 95 percent of all reverse mortgages written in the United States are HECMs.
There are also a few independent investors offering reverse mortgage products, but these programs are not nearly as popular as either HECM or HomeKeeper.
Pros of Reverse Mortgages
There are several advantages of reverse mortgages for borrowers.
Reverse mortgages can supplement a retiree’s income by providing regular monthly payments for the borrower’s lifetime. This supplemental income typically does not count as income for purposes of need-based assistance programs because it is usually considered loan proceeds.
Most reverse mortgage programs also have some type of lump-sum option, which gives the borrower the flexibility to take money out of their home to complete repairs or renovations.
Cons of Reverse Mortgages
If the borrower has existing liens on the property, they must be paid off with the proceeds of the reverse mortgage. This will lower the borrower’s monthly payments (keep in mind that the monthly payment is what the borrower receives, not what he pays).
There is also some concern amongst professionals as to what effect the Debt Reduction Act of 2005 will have on reverse mortgages. Borrowers may also lose a significant tax deduction if they refinance a standard mortgage with a reverse mortgage, as they will no longer be paying mortgage interest.
The Bottom Line
Reverse mortgages are a great tool for older borrowers in certain situations, and should enable lenders to service a broad new market. But most reverse mortgage products are fairly complicated, so lenders should ensure that they understand the requirements, and their responsibilities, before writing reverse mortgages.
Wolters Kluwer Financial Services will continue to monitor the reverse mortgage marketplace to keep you well informed.
NEW NONTRADITIONAL MORTGAGE PRODUCTS ON THE HORIZON
Since the issuance of the final Guidance on nontraditional mortgage products in early October, 2006, many lenders are seeking ways to educate their customers about the features and terms of Interest-Only and Payment Option ARMs. Listed below is a brief description of each of the products that will be available from Wolters Kluwer Financial Services in the near future. These products are designed to assist your institution in educating and disclosing the features and terms of nontraditional mortgage loans.
Disclosure Booklets
Consumers Handbook on Adjustable Rate Mortgages (ARM) booklet (VMP-20)
Mandatory use date: October 1, 2007
Availability date: April 1, 2007 in paper and electronic formats
(A Spanish version will be available at a later date)
The CHARM booklet has been substantially revised to include information regarding “interest-only” and “payment option” mortgages.
Education Booklets
A Guide to Interest Only Mortgages (VMP-15)
Availability date: February 1, 2007
(A Spanish version will also be available at a later date)
This guide is designed to assist borrowers in deciding if an Interest Only (I-O) ARM is the right loan for them. The guide provides an overview of mortgage basics, highlights how lenders calculate and adjust the interest rate on I-O loans and offers many facts to consider when considering an I-O loan.
A Guide to Payment Option ARMs (VMP-13)
Availability date: February 15, 2007
(A Spanish version will also be available at a later date)
This guide is designed to first assist borrowers in understanding Payment Option ARMs through an explanation of adjustable rate features. It then provides explanations of the most common options available (1) Minimum payment (2) Interest Only payment and (3) Amortizing Payment – scheduled term. The guide also provides illustrations to show your borrowers the affect on future payments when choosing each of the options described. Finally, the guide assists borrowers in making smart financial choices with flexible payment options.
Interest-Only Mortgage Payments and Payment-Option ARMs—Are They for You? (VMP-12)
Board of Governors of the Federal Reserve System
Availability date: February 1, 2007 for electronic version, available now in printed format.
The booklet explains both Interest-Only and Payment Option ARM mortgages. In addition it provides key terminology, a Mortgage Shopping Worksheet, and the features as well as the risks of nontraditional mortgages.
Adjustable Rate Disclosures
Wolters Kluwer Financial Services has a variety of Interest-Only ARM disclosures available. For more information regarding program availability please call 1-800-552-9410.
VMP-1790
Variable Rate Mortgage Program Disclosure without 15-Year Historical Example
This form has been revised to include interest–only language. Lenders using the VMP-1790 under a current license agreement will receive this document in their scheduled update.
More information regarding nontraditional mortgage products will be available in the February Information Newsletter.
VMP MORTGAGE WEBSITE TRANSITIONING TO WWW.WOLTERSKLUWERFS.COM
The consolidation of the Bankers Systems and VMP Mortgage websites into the new Wolters Kluwer Financial Services website ensures that you continue to have access to all the content and information you have come to value along with even more resources to help you manage your compliance, content, and technology needs.
As of January 31, 2007, the VMP Mortgage website (www.vmpmtg.com) and the Bankers Systems website (www.bankerssystems.com) are no longer available for viewing. The content and resources previously on these sites are now available at www.WoltersKluwerFS.com.
