Tag Archives: reverse mortgages

HECM Default Risk Analysis – Abstract

18 Aug

An Analysis of Default Risk in the Home Equity Conversion Mortgage (HECM) Program


Stephanie Moulton

Ohio State University (OSU) – John Glenn School of Public Affairs

Donald R. Haurin

Ohio State University (OSU) – Department of Economics

Wei Shi

Ohio State University (OSU) – Department of Economics

July 18, 2014

Abstract:

While reverse mortgages are intended as a tool to enable financial security for older homeowners, in 2012, nearly 10 percent of reverse mortgage borrowers in the federally insured Home Equity Conversion Mortgage (HECM) program were in default on their property taxes or homeowners insurance. A variety of policy responses were implemented in 2013, including establishing underwriting guidelines for the first time in the program’s history. However, there is a lack of data and analysis to inform such criteria. Our analysis follows 30,000 seniors counseled for reverse mortgages between 2006 and 2011. The data includes comprehensive financial and credit report attributes, not typically available in analyses of reverse mortgage borrowers. Using a truncated bivariate probit model, we estimate the likelihood of tax and insurance default. Financial characteristics that increase default risk include the percentage of funds withdrawn in the first month of the loan, a lower credit score, higher property tax to income ratio, low or no unused revolving credit, and history of being past due on mortgage payments or having a tax lien on the property. We simulate the effects of alternative underwriting criteria and policy changes on the probability of take-up and default. While a simple limit on the initial withdrawal percentage substantially reduces default, it also substantially reduces participation in the program. A greater reduction in the default rate with less effect on participation can be achieved by setting thresholds based on credit score or derogatory credit indicators. Further reductions in the default rate with a minimal effect on participation can be achieved by requiring that participants with low credit scores to set aside some of their HECM funds for future property tax and insurance payments, a form of escrowing.

 

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CBS News: Reverse mortgages may be ready for a revival

10 Jun

Reverse mortgages took a hit after the financial crisis as seniors shied away from them amid falling home values and concern about the product’s downsides.

But reverse mortgages may be ready for their own reversal of fortune. Recent government regulations have strengthened them and baby boomers are looking for additional sources of income to fund their retirements, financial experts say.

Reverse mortgages aren’t available to everybody, and they come with some serious issues, said Benjamin Weinstock, a real estate attorney and partner at Ruskin Moscou Faltischek. They’re limited to homeowners over 62 years old and can be used only for primary residences.

While they include some different risks and higher costs than traditional mortgages, reverse mortgages can provide a way for many Americans to fund a comfortable retirement and may grow in popularity as millions of baby boomers enter their golden years. Already, reverse mortgages are recovering from their post-crisis slump, with the number of loans picking up in 2013 after three consecutive years of declines, according to the National Reverse Mortgage Lenders Association.

“The reverse mortgage is going to be a lifeline for millions of retirees in the years to come,” Bankrate chief financial analyst Greg McBride told CBS MoneyWatch. “In large part that’s because people may not have enough saved in their 401(k) plans or IRAs, and the bulk of their wealth may be tied up in the equity in their home. The reverse mortgage becomes the avenue to access those funds.”

The median retirement savings for American workers is $79,300, while the median amount saved outside of retirement accounts is $49,000 for workers between 51 through 60 years old, according to Towers Watson. Yet roughly half of U.S. families have no money saved for retirement. And with many Americans living longer, even those with savings could see their funds erode over the years, leaving them with a lower standard of living as they age.

As some retirees and near-retirees consider their financial outlook, a reverse mortgage might be one option worth considering, along with other strategies such as working longer or selling your house and moving to a less expensive home, said Alicia Munnell, director of the Center for Retirement Research at Boston College, who describes herself as a fan of reverse mortgages.

But for seniors who want to stay in their homes and age in place, a reverse mortgage may be a good option, she noted. “If you think you will move in 10 years, don’t take out a reverse mortgage,” Munnell said.

She also warned that it’s not an appropriate loan for homeowners in dire financial straits. “You have to have enough money to pay property taxes and the premiums for homeowner’s insurance,” she said. “If you don’t, it’s technically in default and the bank can foreclose.”

That’s one reason the loans earned a bad reputation in recent years, as cases came to light about elderly homeowners losing their properties through foreclosures on reverse mortgages. Of course, homeowners are also at risk of foreclosure with regular mortgages if they fall behind in their bills, noted Bankrate’s McBride.

“If you don’t pay your property taxes, you will get foreclosed upon regardless” of the kind of mortgage you have, he said.

Safety measures are built into the process of receiving a reverse mortgage, such as a mandated counseling session before homeowners sign up. New government regulations have added additional provisions to protect homeowners and lenders, including a requirement that lenders make sure borrowers have the assets to pay for property taxes and insurance premiums throughout the loan’s life.

But the biggest sticking point may be the issue of inheritances, with some seniors wanting to leave a house to the next generation.

“The biggest objection is, ‘Well what if I want to leave my home to my kids?'” said McBride. “I’ve got two parents who are retired, and I can tell you I don’t want their houses. I want them to have a secure retirement.”

Adult children “are generally fine” with their parents taking reverse mortgages, Munnell noted. “They want their parents to be comfortable.”

The bottom line? Reverse mortgages might help some seniors afford a comfortable retirement, as long as they understand the pitfalls.

As real estate attorney Weinstock noted: “Nothing is ever all bad or all good, and the same goes for reverse mortgages.”

Welcome to Tradition Title Agency

7 Jan

No title agency works with more diligence and attention to detail than Tradition Title Agency. With decades of experience creating and using innovative solutions, our team of professionals has perfected title searches, transfers and deeds, for reverse mortgages, residential mortgages, and commercial mortgages in New York, New Jersey, Pennsylvania and Florida. We have never had a title issue that we could not find a viable and satisfactory outcome for.

 

Tradition Title saves your company time and money by streamlining and fast tracking your title clearings. We ensure the safety of your clients’ interests and eliminate liability issues with no hidden fees in an average turn around time of just three to five business days.

 

We help you build your business by partnering with you to help educate your clients to make the best choices. Mortgage lenders, brokers, loan officers, and attorneys rely on Tradition Title again and again because your satisfied customer is our goal, too.

 

The entire Tradition Title team is ready to assist you with reverse mortgages, title searches, title insurance, land titles, lien searches, residential title clearing, commercial title searches and more.

 

Please contact our office to find out what we can do for you at 631-328-4410, email us at info@traditionta.com, or submit our Contact Us Form.

We can help!

From the Wall Street Journal this Sunday

28 Aug

Tighter Rules for Reverse Mortgages

Fewer borrowers will qualify and borrowing limits will drop.

 

    By

  • ANNE TERGESEN

The rules governing reverse mortgages are about to change, which could mean less money for borrowers. But it also may help reduce the program’s high default rate.

Congress recently gave the Federal Housing Administration, which insures virtually all reverse mortgages, the authority to make sweeping changes to the federal program for older homeowners. Once the new rules go into effect—some perhaps as soon as Oct. 1—fewer homeowners will qualify for these loans, and the maximum amount they will be able to borrow will decline.

Those who submit an application, complete a reverse-mortgage counseling program, and receive a case number by Oct. 1 will be able to qualify for the higher maximum amounts under the current rules.

Reverse mortgages allow people ages 62 and older to convert home equity into cash. The bank then pays the homeowner, who can elect to receive a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves or sells the house.

Regulators plan to merge the two types of reverse mortgages on the market today: the “standard” loan, which currently allows borrowers to tap from 56% to 75% of a home’s appraised value, depending on their age, and the “saver” loan, which currently pays from 4 to 16 percentage points less. The agency has yet to announce the new limit.

Going forward, most homeowners will be able to borrow less than they currently can with a “standard,” but more than they can with a “saver,” says Peter Bell, president of the National Reverse Mortgage Lenders Association. Regulators also plan to cap the amount many borrowers can tap during a loan’s first year.

Consider a homeowner with a $300,000 property who is eligible to borrow $175,000. Assuming FHA enacts a 60% first-year cap, the borrower will be able to take an upfront payment of up to 60% of the $175,000 loan, or $105,000. Because fixed-rate reverse mortgages currently require borrowers to take everything at once, only those opting for variable-rate loans will have access in later years to the balance (of $70,000 in the above example).

Those who need more than 60% of the loan upfront to pay off a regular mortgage—a requirement—can immediately take the amount they need, up to the entire proceeds ($175,000 in the above example). But such borrowers will have to pay a higher upfront fee for the loan, says Mr. Bell. (FHA has yet to determine the exact amount.)

The changes are designed to curtail the popularity of reverse mortgages that issue large lump-sum payments, a breed that has helped fuel a rise in defaults to nearly 10% of loans outstanding. Defaults occur when homeowners fail to pay property taxes and homeowners insurance.

Regulators also plan to require lenders for the first time to assess borrowers’ ability to cover property tax and homeowners insurance bills, says Mr. Bell. Lenders may require some borrowers to set aside money to cover future property taxes and insurance.

Title Services

26 Aug

An innovative industry leader, Tradition Title Agency provides unrivaled service with continued expansion of our full range of services and solutions in Florida, New York, New Jersey and now Pennsylvania. Our experienced and knowledgeable staff, along with our carefully developed network of key partnerships, can find creative solutions for any complex residential or commercial need for a clear title.

 

We are especially well known for:

Reverse Mortgages

A specialty of Tradition Title Agency, we help lending professionals streamline the often-complicated process of assisting seniors to stay in their beloved homes with a Reverse Mortgage. We create productive working partnerships to educate and assure consumers, leading to less fear and confusion for seniors and their families, and more trouble-free, successful closings for you.

Commercial Mortgages

We save our business-to-business clients time, aggravation and money by anticipating and solving challenges before they become a deal breaker for you or your client. With our 40-plus years of experience, no issue has ever proven irresolvable to the expert team at Tradition Title Agency.

Residential Mortgages

Tradition Title Agency works with all types of lending professionals to help people realize the American Dream of home ownership, insuring that no one has to endure the nightmare of unexpected expenses, claims or losses now or after the closing.

Please call the Tradition Title Agency office for more information at 631-328-4410 or submit our contact us form.

We can help!

Reverse Mortgage Financial Assessment Guidance Proposed

15 May

In the wake of regulatory issues involving the HECM reverse mortgage (Home Equity Conversion Mortgage) the National Reverse Mortgage Lenders Association proposed guidance for the Department of Housing and Urban Development toward a financial assessment of reverse mortgage borrowers.

In order to determine whether borrowers are at risk for falling into default on reverse mortgage loans prior to their taking one out, NRMLA’s policy committee studied borrower data past and present including credit profiles and tax and insurance histories.

“The program is going to require a bit of retooling in response to the lessons that have been learned, to make the product more specific to consumers’ needs as well as their capacity to have a successful experience,” said Peter Bell, NRMLA president and CEO before attendees of NRMLA’s west coast regional conference in Irvine, California this week.

In developing the recommendations, NRMLA considered the goal of making the product more sustainable and better equipped to serve its intended purpose for borrowers to fund longevity rather than the most recent primary use of drawing all proceeds at once.

“Our recommendations on the financial assessment and how that should look is principally in order to reduce the tax and insurance delinquency rate,” said Colin Cushman, President and CEO of Generation Mortgage. “We hope FHA takes it on as at least something to think through.”

The NRMLA committee found the complexity of certain financial scenarios surrounding borrower defaults required a comprehensive solution involving financial assessment as well as principal limit utilization to test whether the applicant will be able to meet their obligations over the life of the loan.

Capacity and willingness to pay ongoing property charges are considered in the proposal, which involves a test for each. The capacity test looks at income and capacity to pay property taxes and insurance charges while the willingness test looks at whether historically borrowers have demonstrated they are willing to keep those payments current.

Additional requirements would apply to higher risk applicants who do not pass both tests, in order to offset that risk. Those might include reduction of principal limit factors, raising the mortgage insurance premium or requiring a tax and insurance escrow.

FHA Insurance Fund May Need Bailout

12 Apr
Presidential Budget Projects Insurance Fund May Need Treasury Support
from the News for the Week of 4.11.2013 NRMLA Newsletter

President Obama’s fiscal 2014 budget, as calculated by the Office of Management and Budget, projects an infusion of $943 million may be required for the MMI Fund Capital Reserve account for the new fiscal year beginning October 2, 2013 to cover projected 30-year losses.  Budget details show positive cash flow of about $4.3 billion for the forward mortgage portion of the fund, but $5.2 billion negative cash flow for reverse mortgage loans.

Since at the end of a loan (or “Maturation Event”) the borrower is only responsible for the appraised value of the home or sales price, the insurance fund covers any remaining balances. The Capital Reserve fund is a projection of the amount of money that will be needed to cover these expenses to FHA.

By statute, the MMI must operate net neutral on an annual basis. It is not supposed to depend on what is commonly called an appropriation, but which in the current verbal war zone are being referred to more frequently as “costs to taxpayers.”

This is just a proposed budget that still needs to be negotiated and passed by Congress. Though no federal budget has made its way out of Congress in the past few years, there seems to be more inertia to pass one this year. With recent years’ books of HECM business looking much better due to increases in insurance premiums and the creation of the HECM Saver, and future effects expected from the recent moratorium on the fixed rate HECM Standard, and, more significantly, increased home values, it is possible that over the time the budget is negotiated, the HECM picture will turn rosier.

At the same time, HUD is looking for the legislative authority to make additional alterations in the HECM program, so that it can make its own adjustments via Mortgagee Letter when a projection like this occurs. In its 2014 Budget Report, “Housing and Communities Built to Last,”  the narrative specifically pinpoints such changes as “instituting a required financial assessment and establishing mandatory escrow amounts.”