Can Reverse Mortgages Save Seniors Facing Foreclosure?
Candy Basselen, 61, owns a steel fabricating business in Chicago. Business was fine until she moved her company to a new location and went to city hall to get her new license.
What she found was the building to which she had relocated was not up to code. Bottomline: No license, which meant no business.
â€œI couldnâ€™t take on any contract work without a business license,â€ she said. â€œMy business came to a standstill.â€
She quickly ran through her working capital, depleted her savings, and fell behind on her mortgage payments. It took just three months for her to go from successful business owner to completely tapped out.
Itâ€™s amazing how fast you can travel the road from having a well-run financial life to facing a sheriffâ€™s sale. For Candy and her husband Paul, 84, it was hard to envision a way out of financial ruin, let alone save the house.
By chance, the Basselens received a postcard in the mail inviting them to a luncheon sponsored by Scott Tucker, a reverse mortgage lender and author of the forthcoming book, â€œReverse Mortgages Z to Aâ€ (Advantage Media, $11.95). After thinking it sounded â€œtoo good to be true,â€ Candy decided to go to the lunch and listen. She liked what she heard and started to work on a reverse mortgage with Tucker.
Reverse mortgages have been around for more than 15 years. According to data from the Reverse Mortgage Lenders Association, the number of federally insured home equity conversion mortgages (HECM), which is the official name for reverse mortgages, grew 6.4 percent to 115,176 loans in 2008.
tâ€™s hardly the explosion of demand that the reverse mortgage industry has always believed was coming, but a confluence of time, aging Baby Boomers, financial instability, and government policy changes may combine to increase demand over the years ahead.
The reverse mortgage concept is simple: Seniors aged 62 and older who own their own homes can do a reverse mortgage and tap into a significant portion of their home equity depending on their age and the interest rate of the loan. According to Tucker, the best part about a reverse mortgage is that the senior pays nothing out of pocket for the loan.
With a reverse mortgage you can elect to receive cash in a lump sum from the loan. You can also choose to receive a monthly payment for a fixed number of years or for as long as the homeowner is alive. A final option is to use the reverse mortgage in the same manner as home equity line of credit. In some cases, some reverse mortgages allow the owner to mix some of the options. In all cases, when the owners die, or move permanently from the home, the property must be sold or the loan paid off in full.
A reverse mortgage is â€œnonrecourse,â€ meaning that the loan can never be for more than the property is worth and the ownersâ€™ heirs will never owe anything on the mortgage. If there is any equity left after satisfying the reverse mortgage lien, the heirs would receive it, Tucker explained.
Sounds great, but reverse mortgages arenâ€™t cheap. Upfront fees include a 2 percent FHA insurance premium (FHA is just about the only reverse mortgage game in town, since Fannie Mae pulled its reverse mortgage loan product off the market) plus a mortgage broker fee of $2,500 to $6,000, depending on the price of the property. The minimum mortgage broker fee is $2,500, which is extremely expensive if youâ€™re only getting a $50,000 reverse mortgage. Going forward, the interest rate is increased by a half percent, which pays for the FHA reverse mortgage premium, Tucker said. So a reverse mortgage at 5.5 percent interest would be 6 percent with the FHA reverse mortgage insurance premium tacked on, a hefty cost.
The big benefit: None of these fees come out of the seniorsâ€™ pockets. All of the costs and fees are taken from the homeâ€™s equity (if youâ€™re underwater with your mortgage, in that you owe more than the house is worth, a reverse mortgage wonâ€™t work for you). While youâ€™re not out of pocket for those fees, you have reduced the amount of equity you have in the home by those fees and expenses.
Still, Tucker argues, for seniors who find themselves out of cash and behind in their mortgage payments, a reverse mortgage may help them save their home.
â€œSeniors have been wiped out,â€ Tucker said. â€œThere are 70-year-olds and 80-year-olds who shouldnâ€™t have been in stocks, but they were.â€
Tucker said that while the economy has hit seniors particularly hard, it isnâ€™t the only reason reverse mortgages are rising in popularity. Last year, FHA raised the reverse mortgage lending limit to $417,000. This year, it was raised again to $625,500. â€œThat [price level] can help someone who has a million dollar house who owes $200,000 on it but canâ€™t make the payments,â€ he said.
How much can you get? According to Tucker, the amount of cash you can tap is calculated by a formula that looks at prevailing mortgage interest rates and how old you are. If youâ€™re 62, you might get 55 percent of your equity; if youâ€™re 100 years old, youâ€™d get around 85 percent of your equity. The younger you are, the less cash you can get from the reverse mortgage. As far as interest rates go, youâ€™ll get more when rates are lower and less when interest rates rise.
And about those interest rates: Currently, seniors have a choice of an adjustable rate mortgage (ARM) that starts at 3.5 percent or a fixed-rate mortgage at 6 percent (FHA insurance is half a percent and is added to the loan rate). Because you get so much more cash with a lower interest rate, most seniors are choosing the ARM, which is tied to the monthly London Interbank Offered Rate (LIBOR), and which can rise 10 percent over the life of the loan. (For those of you playing along at home, that means the 3.5 percent ARM could rise to a 13.5 percent ARM.)
The question that some real estate observers have been asking is this: Will reverse mortgages be the next real estate bubble that forms?
There is some cause for concern. FHAâ€™s reverse mortgage amortization schedule assumes that your home value will increase at 4 percent per year forever. Anyone who got a reverse mortgage two or three years ago and then watched their home lose 20 to 30 percent (or more, like in Miami, which is the most popular city for reverse mortgages), has to be patting himself or herself on the back. If you did the same loan today, youâ€™d get a whole lot less cash out of the deal.
The typical reverse mortgage is kept for 7 years, Tucker says, and with home values dropping like stones, these reverse mortgages are likely to be upside down, or will be soon.
If your homeâ€™s value stayed the same, youâ€™d use up your equity in roughly 12 years, Tucker claims. Although if the interest rate on your reverse mortgage rises to 13.5 percent, your equity would evaporate in much less time.
FHA insures the entire amount of the loan, so the lender can simply file a claim against FHA if the loan is underwater when the home is sold. So no matter what the lenderâ€™s losses are, FHA would make up the difference.
While FHA is taking pains to ensure that it has enough insurance built into the product to cover any future losses, it could mean trouble for taxpayers down the line. What would it take? Try combining an unstable real estate market with that explosive growth the reverse mortgage industry believes will happen as more Baby Boomers in financial trouble choose a reverse mortgage to add a little glisten to their retirement years.
But for house-rich cash-poor seniors who find themselves in financial trouble, a reverse mortgage could be a savvy move to save their home.
Candy Basselen is thrilled with her reverse mortgage. Tucker negotiated with the lender, who agreed to do a short refinance, cutting $50,000 off of the balance owed. The lump sum from the reverse mortgage paid off the first mortgage, and gave the Basselens enough cash to pay their property taxes, homeownersâ€™ insurance and maintenance on the house, Candy said.
â€œI was skeptical. My family was skeptical. We thought it was too good to be true. But Scott came over to my house one day when my daughter was here and we were all questioning him,â€ Candy recalled.
â€œIt was a salvation for my husband and me. It would have been devastating for us to lose our home,â€ she said, adding â€œI just canâ€™t believe Iâ€™m not going to lose my home. We plan on being here for the next 15 years.â€