Estate and mortgageAgency Gives Reverse Loans a Boost
A little-known federal agency is taking steps to bring down the cost of government-insured reverse mortgages and perhaps convince more lenders to make them available to older home owners who are house-rich but cash-poor.
Reverse mortgages allow home owners aged 62 and over to convert the equity they"ve built up in their homes over the years into cash while living at home for as long as they wish.
Borrowers continue to own their homes, and do not need to make any monthly payments. Instead, they can choose to receive the funds as a lump sum, line of credit, or monthly payment. Hence, the name "reverse."
The loan comes due only when the last borrower moves out, dies, or sells the home.
Currently, only two types of reverse mortgages are available in the market place, those that are sold by lenders to Fannie Mae and those that are insured by the Federal Housing Administration.
FHA"s Home Equity Conversion Mortgages, or HECMs, are the most popular. And now, the Government National Mortgage Association is ready to turn pools of HECMs into securities for sale to investors worldwide.
"We are confident the Ginnie Mae security will foster a robust secondary market for reverse mortgages," said Ginnie Mae"s new president, Robert Couch, a former Alabama mortgage banker and chairman of the Mortgage Bankers Association.
"Home values have grown significantly over the years, and reverse mortgages are a good way for many seniors to stay in their homes, maintain ownership and access an additional stream of income to enhance their retirement."
Like Fannie Mae, Ginnie Mae provides an outlet for local lenders which do not want to hold loans in portfolio and helps them keep the cash flowing for more mortgages. Fannie Mae is a publically-owned government-sponsored corporation which buys government and conventional loans, while Ginnie Mae purchases only government-backed loans and is a corporation wholly owned by the Department of Housing and Urban Development.
The Ginnie Mae guaranty, which is backed by the full faith and credit of the United States, should allow mortgage lenders to obtain better pricing for their mortgage loans in the secondary market. And the increased competition among lenders should result in expanded product offerings and reduced costs to borrowers.
"The HECM program is clearly a key growth area for FHA," said Federal Housing Commissioner Brian Montgomery. "We"re working hard to ensure that we keep pace with the needs of our low-to moderate-income borrowers, making programmatic changes to keep up with the times."
The FHA endorsed a record 76,351 reverse mortgages for insurance in the federal fiscal year ended Sept. 30. That"s a 77 percent increase over the 43,131 loans endorsed in fiscal 2005.
"More seniors are recognizing that traditional retirements tools, such as IRAs, pensions, and 401(k)s are not providing sufficient income to help fund everyday living expenses and healthcare," said Peter Bell, president of the National Reverse Mortgage Lenders Association. "Through proper education, more retirees are recognizing that the home they have lived in for so many years can now take care of them by using a reverse mortgage to access the equity accumulated over 20, 30, 40 years to help them living more comfortably."
NRMLA attributes the explosive growth to several factors, including high home appreciation rates in many parts of the country, which allow seniors to access greater amounts of equity. Also, more lenders offering the product (NRMLA now represents about 500 firms nationwide compared to 370 last year at this time), and there has been a greater acceptance of reverse mortgages as a wealth management tool.
Indeed, Montgomery commented at NRMLA"s annual meeting in September that he anticipates reverse mortgages will one day be as commonplace as 401(k)s and other retirement planning tools.
"Thousands of older Americans have learned the advantages of the reverse mortgage," said Kurt Pfotenhauer of the Mortgage Bankers Association. "We believe that securitizing these loans, in addition to other reforms to the program like increasing the loan limit and dropping the volume cap on HECM loans, will provide tremendous benefits for seniors."
More than 20 million Americans over the age of 62 own their homes. Their equity was estimated in 2000 at approximately $2.5 trillion.
The MBA and other groups have been lobbying to eliminate the statutory cap on HECMs and to increase the eligible loan size to the conforming loan limit.