Jumbo lending isn't just on the upswing for traditional home loans. It's also being revived for seniors who want to borrow against the equity in their houses through reverse mortgages.
Urban Financial of America LLC and American Advisors Group, among the five largest reverse mortgage companies by volume, within the next two months will start loans for older borrowers whose homes are worth more than the $625,500 limit for debt backed by the Federal Housing Administration. The only firm that currently offers jumbo reverse loans, Generation Mortgage Co., said it may modify its program to remain competitive.
Jumbo reverse mortgages, which unlike smaller loans aren't insured by the FHA, virtually disappeared after the real estate crash as housing values tumbled and securitizations froze. They're coming back as lenders anticipate demand from aging baby boomers following a 27% jump in home prices since early 2012. Safeguards introduced last year for the government program that limit the amount borrowers can receive in the first year of a loan also may spur interest in jumbos, which generally allow homeowners to get all their money at once.
A proprietary reverse loan, or one without government backing, "has been like a unicorn," said Gregg Smith, chief operating officer of San Diego-based One Reverse Mortgage LLC, which is considering a jumbo program. "Everyone was talking about it, but we hadn't seen one. I would say within six months we'll see at least two or three added."
Reverse mortgages are for homeowners age 62 and older who want to stay in their houses and leverage equity they've earned to get a lump sum, monthly distribution or credit line. Unlike traditional home loans, there's no monthly bill, and the balance and interest are repaid when borrowers move or die.
The reputation of reverse mortgages suffered when property prices plunged during the crash, forcing the government to pay lenders the difference between the original loan amount and the reduced value of the home.
Some borrowers spent their proceeds right away or received inappropriate financial advice, leaving them unable to stay current on payments for property taxes or homeowners' insurance. Banks including Wells Fargo & Co. and Bank of America Corp. stopped offering the FHA loans, also known as home-equity conversion mortgages.
As part of reforms outlined in 2013 that apply to FHA loans, a borrower with a reverse mortgage can't collect more than 60% of the loan amount in the first year after closing unless there are mandatory obligations, such as paying off an existing mortgage. Because home loans become due with missed tax and insurance payments, the owners' ability to keep up with those bills must be verified.
Reverse mortgages totaled 18,000 this year through June, down from 58,000 in the same period of 2009, according to data provider Reverse Market Insight Inc. The pace is likely to pick up in the coming years, according to Alicia Munnell, director of the center for retirement research at Boston College.
"Retirement needs have expanded and the retirement system has contracted, so more people will need to turn to their homes" for income, she said.
For older Americans with expensive homes, staying in the house and getting a jumbo reverse mortgage may be a better option than selling investments, said Munnell, who's an investor in and board member of reverse mortgage lender Longbridge Financial. Selling assets that have increased in value may result in capital-gains taxes, while income drawn from a reverse mortgage is tax free, she said.
Next month, Urban Financial plans to start offering reverse mortgages with a maximum loan amount of about $2 million, which borrowers would get up front, and a 7% interest rate, said Steve McClellan, chief executive officer of the Tulsa, Okla.-based firm. Urban Financial expects that as many as half of seniors with home values of at least $700,000 considering a reverse mortgage will take the jumbo, he said.
The larger loans may be attractive to borrowers who need cash for a specific event right away, such as in-home medical care, purchasing an investment property or giving money to a child who's starting a business, he said.
American Advisors Group plans to start offering proprietary loans by the end of October. The Orange, Calif.-based firm's jumbo reverse mortgages will be available initially in states such as California and Texas and have a cap of about $6 million, said Chris Mullins, chief operating officer. Interest rates will be in the 6% to 8% range.
The option should be most popular among borrowers with homes valued from $750,000 to $1.5 million who are looking to pay off existing mortgages, he said.
"Using proceeds to pay off a mortgage leads to a huge monthly cash-flow swing," Mullins said.
Fees for reverse mortgages can be expensive, so homeowners should evaluate all other options before deciding on the debt, said Norma Garcia, a San Francisco-based attorney at advocacy group Consumers Union.
Proprietary loans also are potentially risky because, unlike FHA-guaranteed reverse mortgages, they may not require financial counseling, she said.
"Homes are usually the biggest and last remaining asset, so these decisions aren't to be made lightly," Garcia said.
Generation Mortgage, based in Atlanta, already gives wealthier senior homeowners the option to get a loan for homes valued from $500,000 to $6 million at an interest rate of about 9%.
The FHA's changes last year have spurred a 20% increase in applications for Generation Mortgage's proprietary loans, according to Matthew Gregory, the firm's vice president of retail sales.
Under the program, a 72-year-old borrower with a house valued at $1.25 million would be eligible for almost $42,000 more than with an FHA-backed loan that only takes into account a maximum value of $625,500.
Generation Mortgage executives are discussing changes to the fees associated with the proprietary reverse mortgage as well as the interest rate charged and maximum loan amount, said Gregory, who declined to provide specifics.
Without the FHA to insure jumbo reverse mortgages, packaging the loans into bonds has been difficult and lenders have to either hold onto the debt or find outside investors.
That has deterred some companies from offering proprietary loans because the FHA won't be there to step in and cover the difference if the home is worth less than the original loan amount, according to Mullins of American Advisors Group.
"What had stopped the product up to this point was no securitization," said Mullins. Now that the secondary market has thawed and rates are still low, "I think the search for yield is opening up people's eyes."