New options open for homeowners seeking a reverse mortgage
You’ve probably seen actor Tom Selleck suavely pitching federally insured reverse mortgages on TV and thought, hmm, that sounds interesting. He says you can turn your home equity into cash and not pay back anything — no principal, no interest, no fees — for years after your retirement.
And it’s true: Some form of a reverse mortgage could be a good choice for you, but it might not be the government-backed type Selleck is hawking. Those loans have hit tough times, and growing numbers of lenders have begun offering alternatives — proprietary, non-government reverse mortgages, including an innovative variant unveiled last month that allows owners to retain their current low-interest-rate regular mortgages while pulling out additional funds via the industry’s only “second-lien” reverse loan.
A little background: Annual volumes of the Federal Housing Administration’s reverse mortgages have tanked to their lowest level in 13 years and appear headed for further declines. The program is a financial nightmare for the FHA, performing so poorly that the FHA’s commissioner, Brian D. Montgomery, complained recently that it is “still hemorrhaging money,” despite repeated reform efforts.
Worse yet, FHA recently discovered hanky-panky in the appraisals used for reverse mortgages. An internal study by the agency found that in a sample of 134,000 loans, a stunning 37 percent of them had inflated values — the appraisers hyped the numbers — thereby exposing the agency’s insurance fund that backs the mortgages to bigger hits down the road. Some of the bogus value estimates billowed as high as 30 percent over actual market value in 2008 and 2009, though the average has moderated more recently.
Federally insured reverse mortgages are targeted at homeowners 62 years and older. They allow borrowers to supplement their retirement incomes by converting their home equity into cash via lump sum payments, monthly payments or credit lines. No repayment of the debt is required until the homeowners sell the house, move out or die. If the amounts borrowed exceed what the house can bring in a sale, the lender can file a claim against FHA’s mortgage-insurance fund and receive compensation.
Because of continuing multibillion-dollar insurance-fund losses, FHA has tried to rein in the reverse-mortgage program by limiting the amounts seniors can borrow against their houses, raising insurance premiums, and requiring applicants to demonstrate that they are creditworthy. These restrictions and other issues such as high fees have contributed to the program’s sharp plunge in volume, from just under 115,000 new loans in 2009 to 48,385 in fiscal 2018, the lowest total since 2005.
Drastic declines in business volume like this have spurred lenders to come up with alternatives. At least four major companies now offer proprietary, non-government reverse mortgages. They include Finance of America Reverse, Reverse Mortgage Funding, Longbridge Financial and One Reverse Mortgage. All of them allow much larger maximum-loan amounts than FHA. They also charge no mortgage-insurance premiums, and may permit loans to owners of condominium units in developments that have not been approved for FHA financing.
Kristen Sieffert, president of Finance of America Reverse — which continues to offer standard FHA-insured reverse mortgages along with its four proprietary alternatives — told me “we want to create a new proprietary product market for the long haul” that offers homeowners nationwide more flexibility and innovation than FHA can. For example, at the end of September, her firm debuted the industry’s first and only “second-lien” reverse mortgage, which is designed to allow owners who have low fixed rates on a first mortgage to retain that loan while tapping their equity via a fixed-rate second mortgage requiring no immediate repayments.
Other companies’ proprietary offerings have their own special niche features designed to improve on FHA’s rules: Equity Edge’s program lowers the eligibility age for some borrowers to 60 instead of 62; One Reverse Mortgage permits loans on houses with solar panels, to cite just a couple of examples.
Proprietary reverse loans have their own downsides, however. Generally, they are not aimed at the lower- to moderate-cost housing market like FHA, so they screen out potentially large numbers of owners from coverage. They may limit the total amount of equity you can access more strictly than FHA and require better credit histories. Like all reverse mortgages, proprietary alternatives should only be considered after discussions with an experienced financial counselor to make certain you’re getting a good deal.
Bottom line: They’re an important, growing resource for senior homeowners and worth at least a look if you’re considering a reverse mortgage.