PETER BELL
‘Word-of-mouth product’
As reverse mortgages slowly begin to shed the stigma once attached to them, Federal Housing Administration statistics show activity for such loans increased dramatically in fiscal year 2004. Massachusetts was also listed as one of the top 10 states in terms of volume of Home Equity Conversion Mortgage endorsements.
According to the national Mortgage Bankers Association, the FHA endorsed a record 37,829 reverse mortgages during fiscal year 2004, more than doubling the fiscal year 2003 production level of 18,097.
The FHA’s Home Equity Conversion Mortgage program allows consumers over the age of 62 to tap into the equity in their home. The loan is not repaid until the home is sold or the last borrower moves out.
According to the MBA, HECM program usage increased in the 1990s, but starting in 2000 endorsements grew dramatically from about 6,000 to almost 38,000 in 2004.
Following behind larger states like California, Texas and Colorado, Massachusetts had 898 HECM endorsements in fiscal year 2004.
According to Peter Bell, president of the National Reverse Mortgage Lenders Association, reverse mortgage volume grew approximately 125 percent for the year ending Sept. 30.
“More people are hearing about it,” said Bell. “It’s a real word-of-mouth product. There is a very good network of senior organizations in Massachusetts.”
The MBA said the growth in reverse mortgages is a result of lenders becoming familiar with the product and undertaking extensive outreach efforts to seniors. Senior homeowners and their financial advisors have also become more comfortable with reverse mortgages and now recognize it as a financial tool, the MBA said.
George Downey, president of Harbor Mortgage Solutions in Braintree, said he has noticed an increase in reverse mortgages locally.
“We are all relatively new to it,” said Downey.
But, he said, as the program comes into focus and the features of reverse mortgages are refined and streamlined, interest has grown.
According to Kathie O’Neil, regional program manager for the senior product group in New England for Wells Fargo, Massachusetts was the second-to-last state in the nation to endorse the HECM program. Now that the state allows for these reverse mortgages, O’Neil said they becoming more widely recognized and used.
A reverse mortgage is a loan that that enables older homeowners to convert part of the equity in their homes into income without having to sell their home, give up a title or take on new monthly mortgage payments. A homeowner borrows small amounts – monthly or at other intervals – through a line of credit. As time goes on, the loan balance increases and equity decreases. Payment is required once, at the end of the loan, which is usually when the borrower dies, sells or no longer uses the home as a primary residence.
The NRMLA lists several other reverse mortgage options such as Fannie Mae, which is a major investor in reverse mortgages, including the HECM program. But in 1996, Fannie Mae developed its own proprietary Home Keeper reverse mortgage as a conventional-market alternative to the HECM. The Home Keeper is intended to address unmet needs that could not be served by the HECM program, such as individuals with higher property values, condominium owners and seniors wishing to use a reverse mortgage to purchase a new home.
California-based Financial Freedom Senior Funding Corp. also introduced a “jumbo” proprietary reverse mortgage product called Cash Account to benefit homeowners living in higher-priced homes valued above the FHA and Fannie Mae lending limits. Financial Freedom is a subsidiary of IndyMac Bank.
According to NRMLA’s site, the product works for unusual properties or situations not typically allowed under FHA and or Fannie Mae programs.
In 2004, Financial Freedom introduced the Simply Zero Cash Account, the first reverse mortgage loan to eliminate all up-front costs.
With the Simply Zero Cash Account, borrowers are required to draw 100 percent of their maximum available benefit at the loan closing, however Financial Freedom has kept the interest rate structure the same as its standard Cash Account, and it remains the only “jumbo” reverse mortgage product available.
Jim Mahoney, chief executive officer of Financial Freedom, said the company is the largest reverse mortgage lender in Massachusetts when combining both retail and wholesale operations.
‘Solution to Issues’
For lenders, reverse mortgages can carry more responsibility. Downey said when his company began looking at reverse mortgages, it looked like just another product.
“I have found that it is not that,” said Downey. “It is a very different business. The due diligence on it is very different. You are dealing with a very vulnerable subset of society.”
Downey said lenders also spend “a considerably longer period of time” working with the senior borrower vs. someone getting a typical mortgage.
John Brodrick, president of First Service Home Mortgage, echoed Downey’s sentiment that reverse mortgages are not products to sell and the time spent with borrowers is different from a more typical borrower.
“This isn’t something you sell,” Brodick said.
He said lenders must dedicate the time necessary to assure people are informed during and after the process.
Many of the lenders that work in Massachusetts said reverse mortgages have become popular in the Bay State for a handful of different reasons.
“We have a denser population up here,” Downey said. “Property values are higher here.”
Brodrick said the aging population in Massachusetts has seen an increase in their home values.
“There is a lot of available equity due to market appreciation,” Brodrick said.
O’Neil agrees that housing prices in Massachusetts have contributed to an increase in seniors who consider applying for reverse mortgages. While Wells Fargo cites an average age of 74 for consumers who take out reverse mortgages, O’Neil said she is seeing younger borrowers and more couples participating. In the past, more widows or widowers who had a experienced a loss of income or pension utilized the program.
Five years ago, Bell said the typical reverse mortgage borrower was a widowed female in her late 70s, but today it is likely to be a couple in their mid-70s.
With the option to use home equity to their advantage, seniors are using the extra cash in various ways.
O’Neil said some people are looking to supplement an existing portfolio that is not performing as well as they would like or to help pay increasing property taxes. Others use it make minor repairs to the home or for health care costs.
“This federal program [HECM] provides financial solutions to assist clients and their families with those needs,” O’Neil said.
Brodrick, who works with Financial Freedom, said some of his borrowers have used the reverse mortgage for lifestyle improvements.
“They could realize a significant amount of cash in hand,” Brodrick said.
Some seniors decide to travel with the extra money or help their children.
Mahoney said an under-publicized use of reverse mortgages is to pay off a home mortgage. He explained that when seniors retire they enter into a fixed-income phase, but still have mortgage payments. The cash from a reverse mortgage can help to make those payments.
Bell said uncovered medical expenses are a popular use of the money from reverse mortgages, as well as money spent on modifying the home to be more comfortable or accessible for someone as they age.
“Reverse mortgages is a solution to issues people are dealing with,” Bell said.
As the New Year approaches, lenders are preparing for larger reverse mortgage loan limits dictated by the Department of Housing and Urban Development for the HECM program. Currently, the loan limit for a one-family home in Suffolk County is $290,319, the highest in the state. The lowest loan limit, $180,500, is in the western Massachusetts counties.
“In January, we as an industry are expecting limit increases,” said O’Neil.
The amounts of money people receive depends on a few factors, including borrower’s age, type of reverse mortgage, current interest rates and appraised home value.
Jennifer Jope may be reached at jjope@thewarrengroup.com.
