According to the most recent U.S. Census in 2010, an estimated 2.5 million people—or roughly 13.5 percent—of New York’s population is over the age of 65. Older New Yorkers, especially in New York City live in longtime neighborhoods or in senior-only developments. Some of them may be in the market for a reverse mortgage, a type of loan structure available to senior homeowners 62 years of age and older.
A reverse mortgage is a special type of home loan that lets the borrower convert a portion of the equity in their home into cash, according to the federal Department of Housing and Urban Development (HUD), which administers the great majority of the reverse mortgages written in the U.S.
Although the interest keeps building up, the reverse mortgage doesn’t come due or payable until the borrower passes away or moves out of the home permanently—meaning that he or she hasn’t lived in the home for a year or more, according to Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA). The repayment amount can’t exceed the sales value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s heirs or estate.
“There are liabilities taken on by lenders as part of their responsibilities as Federal Housing Association (FHA) lenders,” says Bell, but “the FHA insurance is designed to help mitigate those liabilities.”
The first reverse mortgage was given in 1961, but that was an isolated case given by a local savings and loan in Portland, Maine, to the widow of the lender’s high school football coach. The concept became more popular in the 1980s, and in 1987, under the influence of the AARP, Congress created the Home Equity Conversion Mortgage, or reverse mortgage program. In 1989, HUD selected 50 lenders to make the first FHA-insured reverse mortgages. After years of popularity, however, the current financial situation has seemingly made some lenders think twice about offering reverse mortgages.
Some of the largest lenders, such as Bank of America, Wells Fargo and Financial Freedom, have stopped offering the product, although they continue to honor existing reverse mortgages. Still, there are still some large companies offering reverse mortgages, such as Metropolitan Life. New York homeowners living in cooperatives are currently out of luck as there is no approved HUD/FHA product available for them at the present time.
A Changed Landscape
Today, according to Lemar Wooley, a spokesman for HUD, Home Equity Conversion Mortgage (HECM) loans make up about 95 percent of the reverse mortgage market. These are the only reverse mortgages insured by HUD’s FHA. Applicants must be 62 or older; own the property outright or have a small mortgage balance; occupy the property as their primary residence; not be delinquent on any federal debt; and participate in a consumer information session given by an approved HECM counselor. And HUD-approved condos definitely are one of the types of housing that meet the requirements.
Since October 2010, lenders, under the direction of FHA, have also been offering a new product called the HECM Saver. Under this program, eligible borrowers are charged lower upfront fees. However, these lower fees result in less money being made available to the borrower than under the traditional HECM loan.
Applying for a reverse mortgage is a simple process. As in any business transaction, you call up the company, make a date with a representative, pay an application fee, then an appraisal fee.
A counseling session, as we’ve mentioned, is also mandatory under HUD rules. HUD, and the lenders themselves, have lists of approved counseling organizations. Some will even do the counseling over the phone.
Advice on how to prepare to talk to lenders and counselors, according to Bell, can be found on the National Reverse Mortgage Lenders Association website at www.reversemortgage.org. Prospective borrowers can also find a NRMLA member lender on the site.
Reverse Mortgage Calculators
“All reverse mortgage lenders who are originating the FHA-insured HECM use the same calculator to determine your benefits,” says Michael Branson, CEO of All Reverse Mortgage Co., a California-based lender that operates in about 13 states.
“As long as each lender is using the same property value and the same birth dates, then the only things that can affect the amount of money you would receive would be the interest rates (and then only if one or both lenders are far enough over the floor of 5%) or the fees,” he adds.
In case you’re wondering what a reverse mortgage calculator is, it asks your zip code, your birth date, your spouse’s (or other co-owner’s) birth date and how much your home is work, as well as, in some cases, optional questions such as mortgages and liens on your home, and the cost of any necessary home repairs. All this together will help calculate the amount of the loan you will receive.
Reverse mortgage calculators can be found on the NRMLA site, individual lenders’ sites, on the AARP’s website and on a link from the HUD website.
Of course, not everything always goes smoothly. What happens when a borrower moves or passes away? What does it mean that “the repayment can’t exceed the value of the home?” And what if the market bottoms out and the estate can’t get enough money for the property?
These topics, according to HUD spokesman Brian Sullivan, are covered during the aforementioned HECM counseling sessions. Lenders recover their principal, plus interest, when the home is sold, usually by the borrower or heirs, and the remaining value of the home goes to the borrower or heirs.
“If the sales proceeds are insufficient to pay the amount owned,” he says, “FHA will pay the lender the amount of the shortfall. FHA collects an insurance premium from all borrowers to provide this coverage.”
Even though the FHA makes up the shortfall, however, losses are still a matter of concern. “When the lenders made these loans four, five, six years ago,” says attorney Neil Garfinkel of the New York law firm of Abrams Garfinkel Margolis Bergson, LLP, “they assumed appreciation would occur. Now, the marketplace has changed. I know of a number of reverse loans that do not have the value needed to pay off the outstanding balance.”
What about accidents or disasters—for example, what happens if the housing unit or building the mortgage was taken out for has a fire, or becomes uninhabitable because of mold or other conditions? The answer, as with all mortgages, is that borrowers are required to have adequate homeowners’ insurance on the property.
Using Reverse Mortgage
to Pay Off Existing Mortgage?
Prospective borrowers, according to Sullivan of HUD, don’t have to own their own homes outright before they can be considered for a reverse mortgages. However, eligible homeowners with existing mortgages must pay them off at the origination of the HECM loan. “This means,” he says, “that the HECM principal limit loan amount must be sufficient to pay off an existing mortgages.”
“Usually,” says Peter Strauss of Epstein Becker & Green, another New York attorney, who specializes in elder law, “seniors, at least in this generation, have a relatively small first mortgage. If they can borrow up to $30,000, $40,000 with a HUD mortgage, they can still come out ahead.”
What would cause a senior to be turned down for a reverse mortgage? “A senior who doesn’t have enough equity in the property is the most likely person not to be able to quality,” says Garfinkel.
What They’re Used For
Once a reverse mortgage has been approved, the borrower has a choice of how to receive payments. According to Bell, the disbursements can come in the following methods: lump sum, line of credit, life tenure payments, or any combination of the three.
“Every borrower has individual needs,” he says. “Those looking to eliminate their monthly mortgage payment by refinancing with a reverse mortgage will likely choose a lump-sum loan, which is offered at a fixed rate. Homeowners who want to draw money down over time may find the line-of-credit feature advantageous.
“A special aspect of the line of credit is that the available balance is adjusted upwards annually. For homeowners looking to have a constant stream of cash coming to them as long as they live in the home, the life tenure option delivers constant monthly payments.”
What About Co-ops?
Although the most common form of seniors’ residential development nationwide are condo associations, a great majority of New York City’s housing stock is of the co-op variety.
At least one well-known lender, which is now out of the reverse mortgage business, offered reverse mortgages to New York co-op shareholders starting in the early 2000s. Strauss recalls that in these cases, “It was up to the co-op boards to accept them or not.” He recalls that when some boards didn’t want to accept reverse mortgages for clients who were shareholders and needed cash, he told the board presidents that this was an example of “the `d’ word—discrimination” and that letting them pay their fees with a reverse mortgage that the lender had already approved was better than letting them default on the unit.
Today, says Garfinkel, whose firm has been “very involved in closing reverse mortgages for close to 20 years,” there are currently no officially approved co-op reverse mortgage products. HUD has drafted documents that would allow HECMs for co-ops (Garfinkel assisted in drafting these documents), but after several delays, there has still been no FHA approval.
If HECM reverse mortgages are approved by FHA and offered with the agency’s backing, since the resident owns shares and not real estate as such, the value would have to be calculated. Strauss says this would be done by getting an appraisal.
Are Reverse Mortgages For You?
Like everything else, reverse mortgages are not for everyone. Strauss says that as an elder law attorney, he became interested in reverse mortgages in the context of how to help seniors pay for long-term medical care, since Medicare pays for this only on a limited basis and doesn’t pay at all for “custodial care,” meaning support services for daily living.
“I gave them a list of all options—long-term care insurance, using their life insurance, and then we come to reverse mortgages. I look at it as one of the tools available before we get to Medicare, which I consider the payer of last resort.”
Some seniors could have trouble understanding the terms and conditions of reverse mortgages. And a 2006 survey by AARP showed that more than two-thirds of the borrowers polled by the organization felt the fees were high.
The same survey, however, revealed that 93 percent of the borrowers said the reverse mortgages had a mostly positive effect on their lives, 93 percent of them were satisfied with their experience with lenders, and 95 percent were satisfied with their experience with their counselors.
Thankfully, there are many places where senior homeowners can turn for advice on reverse mortgages: AARP, HUD, the lenders themselves, the National Reverse Mortgage Lenders Association, and, in many cases, their co-op or condo’s manager or board president.
Raanan Geberer is a freelance writer and a frequent contributor to The Cooperator. Associate Editor Hannah Fons contributed to this article.