I decided to add a page for reverse mortgage tips that are not readily accessible in multiple sites on the internet.

 In April, Fannie Mae, the main purchaser of FHA HECM reverse mortgages, increased the margins required on these loans.  This cut back the maximum loan proceeds to a small degree.  They are attempting to attract other investors to come to the table and purchase HECM.

It hasn't worked so far, and the small pricing difference does affect some people at the margin.  But, for HECM borrowers that think ahead & get a HECM line of credit before they need it, they just got a raise! If they take the proceeds as a line of credit, the untapped line of credit balance grows at the note rate plus 1/2%.  With the chance of runaway short term interest rates a real possibility after this huge, recent commitment to federal deficit spending, we may see 10% short term rates again in our life. 

But, let's just say the short term rates increase to 6.5%.  Add the 1/2% margin for the HECM calculation and those of you with large equity positions would have locked in 7% increase in the unused portion of your line of credit.  It doubles about every 10 years at that rate.  Will home values double?  See what I mean?:)  It is a glass half full scenario that will actally benefit many reverse mortgage holders.

This is no where near a complete analysis.  I just want you to consider the potential benefit of being proactive in obtaining a reverse mortgage.  Sometimes it makes sense.  If we only could make all of our decisions with the benefit of hindsight!

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The most recent issue arises from HUD mortgagee letter 08-38.

According to some industry experts, most HECM counselors and even key mortgage regulators mis-read the intent of chapter 1, paragraph 3C (1-3C) of the HUD Handbook 4235.1 Rev-1.

"The HECM is a "non-recourse" loan. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt."

Mortgagee letter 08-38 fleshes that out a little bit:)  It ignited a controversy among reverse mortgage experts.  Mostly, it is inside baseball and will do little harm to anyone with a credible need for a reverse mortgage.

Bottom line: If borrower/s live in their home long enough for the reverse mortgage to be larger than the reverse mortgage balance, they can still decide to sell the home for 95% of market value, but it would have to be an arms length sale (not to relatives or those with other identity of interest). If the sale net proceeds do not cover the loan balance, the only other claim is to the FHA insurance pool, or the reverse mortgage lender can eat the shortage.  There is no recourse as to the borrower or the borrowers estate, as the case may be.

A non-arms length transaction would require the outstanding balance be covered from sales proceeds. This appears to be the distinction HUD wanted to make.  It sure got lots of folks in a tizzy:)

Tip for holders of reverse mortgages:  Say you got your reverse mortgage at the top of the market in 2005-6 and the area has fallen in home value so much that you will soon have a mortgage balance higher than market value.  If you have a line of credit, you might want to seriously consider drawing 100% of the line of credit and putting it into a money market fund, a CD, etc.  Even though the yield will probably be lower than the note rate + 1/2% that your line of credit grows, if some unexpected event causes the eventual sale of the home, if the line of credit remains untapped, that is money the borrowers and/or their estate could have retained.  It will go to the lender or more likely to replenish the FHA insurance reserve fund, unless you plan ahead and tap the line of credit. 

If the loan is comfortably below the current value of the home and the line of credit money is not otherwise needed, than I would simply not draw on it, justwatch it grow:)  I think most people that decide on a reverse mortgage should be so comfortable about where they live and their prospects to stay there thatone of their new goals in life is to stay happy, healthy and well in their home so long that they are upside down! At that point, the goal might be to see how upside down one's mortgage can get, since it will not effect them or their relatives adversely!

In my opinion, I think the actuaries may be underestimating how much the happiness of staying in a home that is comfortable and living with lessened day to day financial worries may extend the length of life, let alone the quality of life. Time will tell, as they look backwards, checking their calculators and underlying assumptions.

Pending Minnesota Reverse Mortgage Legislation

 Update May 22,2009.  Governor Tim Pawlenty vetos Reverse Mortgage bill

 The Governor's official statement

Attorney General Lori Swanson has promoted legislation to regulate reverse mortgages in Minnesota.  The lion's share of reverse mortgages are FHA HECM reverse mortgages, so any final legislation implementing rules and regulations will become a template, fit over the rules and regulations of HUD/FHA.

I have heard the proposal included a 30 day rescission period, which was reduced to a 10 day period. Rescission nationwide on refinances is 3 business days (including Saturdays, excluding major holidays).

Another overlay is proposed counseling.  Right now, counseling by HUD certified counselors, independent of the loan originator, is required for all transactions.  In fact, a signed counseling certificate is standard protocol before collecting the appraisal fee and proceeding beyond pre-screening of a a reverse mortgage candidate.

Three issues:

1. Will the added rescission time help more than it hurts the applicant (many applicants get a RM as a last resort, to save themselves from foreclosure, etc)?  The process is drawn out naturally over the dimension of time as applicants have to take a breath, schedule & wait for independent counseling, then go through the FHA appraisal gauntlet to get the market value opinion, and on to closing, which may be rescinded on any of the following three days.

2.  Will a second layer of counseling make the situation more clear or more confusing for the average reverse mortgage candidate?  I will leave that as a rhetorical question:)  One thing to note, is that the various non-profit entities have moved to the ceiling rate of $125 for counseling. There is a significant wait required to get an appointment with the better counselors.  Theoretically, there is still free counseling out there somewhere, but the line is bound to be quite long.

3. What will this all cost? Loan originators are prohibited by HUD from paying for the counseling.  I assume the state budget will not allow for free counseling if a state sponsored counseling session is piggybacked onto the HUD mandated independent HUD approved counseling session.  If my reasoning is correct, this extra layer of protection will be funded by the applicant.I assume, there will be a need for administrators of the program at the state level that will also need to be funded into perpetuity.

My opinion?  Until I analyze the final legislation, I will reserve judgment.  No matter how much government sponsored protection is offered, it will always be the job of the loan applicants and those they choose to let into their sphere of influence to understand the program, the costs, the pluses and minuses with regards to their unique situation. 

A good reverse mortgage loan officer can help a reverse mortgage applicant get to the key issues and the heart of the matter much more quickly, but it is always a good idea while trusting the person you have chosen to work with, to also verify key information from an independent third party.

Don't put yourself in the position of a homeowner whose plumbing has just failed, his basement is filling up with water, yet he calls plumber after plumber trying to negotiate the lowest price and turn time:)

Thankfully, FHA sets the HECM rate & you won't have to do last minute shopping, if you check out the veracity of that statement in advance.

Email me or call with any questions.  homeloans@usfamily.net

763-439-6009

Click here to access Reverse Mortgage Daily

Reverse Mortgage Daily offers 2 or 3+ articles daily that relate to reverse mortgages.  Pending legislation is covered as are proposed changes to reverse mortgage programs offered.  If you want a glimpse on industry views, read the comments left by reverse mortgage originators across the nation.

In the upper right side of the Reverse Mortgage Daily site is a link that will let you sign up for daily e-mail summaries of Reverse Mortgage Daily articles.  It works great and will keep you very up to date on industry and program changes!

I have no affiliation with that site and only subscribe to the free email updates at this time.  The vendors that advertise on the site perk my curiosity now and then, so maybe in the future I will use some services, not sure.