Home Equity Conversion Mortgages are safer than ever, thanks to recent regulatory changes made by the Department of Housing and Urban Development. When applied appropriately, HECMs offer advantages over home equity lines of credit, allowing seniors to postpone tapping other retirement resources by leveraging a tax- and payment-free option that serves as a reserve thereafter.
Lenders serving senior homeowners interested in accessing their home's equity often suggest a HELOC. However, by not also providing the HECM as a viable option, lenders do senior borrowers a disservice.
HELOCs have a monthly payment and typically must be repaid within 10 years, or a dramatic interest rate increase occurs. HELOC rate resets that potentially double monthly payments could significantly impact quality of life for fixed-income seniors, perhaps setting the stage for loan default.
Conversely, HECMs have no fixed repayment date. The borrower can access HECM funds as long as they live in the home, and the balance is not due until the borrower passes, moves or sells the home (unless the surviving non-borrowing spouse remains in the house via the Mortgagee Optional Election allowed by HUD Mortgagee Letter 2015-15 and described below). Interest rates fluctuate with an adjustable-rate HECM, but those fluctuations only affect its outstanding balance, not the total funds available.
Financial Assessment Rules
In the past, some HECMs were originated without a full understanding of the borrower's long-term financial scenario. As a result some borrowers underestimated monthly expenses such as taxes and insurance, which are a cost of ownership still due on homes financed through a HECM.
This year, HUD implemented new Financial Assessment rules for reverse mortgage lenders. Similar to calculations for traditional mortgages, FA requires that lenders calculate borrowers' ability to stay current on taxes and insurance, and set aside some HECM funds to cover these costs if needed.
The best option for financially secure seniors is the adjustable-rate HECM, since it provides the most flexibility. Further, the HECM adjustable interest rate is typically lower, saving actual equity dollars. With a fixed-rate HECM, borrowers take a lump sum at closing and incur higher interest rates, typically to avoid an immediate financial challenge.
Especially attractive to senior homeowners is that fund availability for the adjustable-rate HECM increases as home equity increases, without refinancing. Data released by the National Reverse Mortgage Lenders Association and RiskSpan Advisors in July shows seniors' home equity increased by $63.5 billion in first-quarter 2015, marking the 12th consecutive quarter of increased home equity. RiskSpan estimates the value of senior-owned housing at $3.9 trillion, the highest level seen since before the financial crisis.
Servicing and Foreclosure Policies
Many commonly believe that a surviving spouse not listed as a co-borrower on the HECM will be required to immediately repay the loan upon the borrower's death or be foreclosed upon. That is simply not true. Because HECMs are Federal Housing Administration insured, neither the borrower nor the estate must make up the difference should the loan become "upside down."
HUD Mortgagee Letter 2015-15 addresses the non-borrowing spouse concern by allowing lenders to pursue a Mortgagee Optional Election upon the death of the borrowing spouse rather than initiate foreclosure proceedings. This assigns the loan to HUD, and provides that the non-borrowing spouse can remain in the home if able to fulfill loan conditions.
In contrast, the lender may cancel a HELOC upon a spouse's death — even when both spouses are listed as borrowers — because the initial loan determination included income information from the deceased borrower. Further, legal liability varies from state to state for a HELOC following a spouse's death. In a community property state, such as California, the surviving spouse is responsible for debt not covered by the estate.
Although it's often the subject of negative press, the HECM product is sound. Complaints emerge largely from "last resort" borrowers versus borrowers seeking a retirement supplement or a HELOC option. The education gap, and occasional "piling on" of negative media stories, has unfairly tarnished the HECM reputation. Consumer Financial Protection Bureau data shows HECM complaints are minimal compared with forward mortgage complaints.
Further, HECMs provide forward lenders significant financial incentives to adopt the product, most of which does not come from the borrower. Rather, higher interest rates, low default/non-repayment rates and FHA-insured status create a secondary market premium, as high as 112 basis points, for Ginnie Mae-securitized bonds.
A comparison of the commissions gained on HECMs and HELOCs, respectively, reveals further lender upside. There is a distinct disincentive to originate lower value HELOCs, and commissions on these loans in general are so low that many independent mortgage bankers avoid them. In contrast, a HECM that includes refinancing an existing mortgage nets originators $5,000 on average.
As senior homeowners look to their lender for guidance on the best way to access their home's equity, lenders have a responsibility to keep HECMs in the mix to ensure their borrowers are obtaining the best mortgage equity loan option for their situation and goals.
Jeffrey Taylor is president of Wendover Consulting, Greensboro, N.C., and a board member of ReverseVision, San Diego.