Elimination Of Counseling Budget For FHA Reverse Mortgages May Open New Opportunitities
The Federal Housing Administration (FHA) came out with the original Home Equity Conversion Mortgage (HECM) reverse mortgage program in 1989. Fees were high and the government mandated counseling through FHA about the risks homeowners were taking was sorely inefficient. Funding for that counseling is no longer available.
Reverse mortgages got a bad reputation during the mortgage crisis. Retiring homeowners in need of cash saw a gold mine in their home equity. They were unaware of the risks associated with taking the maximum amount of equity allowed. The mortage interest premiums on these loans was exorbitant. If the homeowner later decided to sell, the loan amount could easily have become greater than the house was worth. If the homeowner died, newly bereaved spouses or inheritors of the estate could be suddenly subject to foreclosure.
In 2009, FHA came out with the HECM Saver program. It charges .01% in mortgage insurance premium instead of 2% for the original version. And it’s tax free. It also makes only a portion of the equity available. This plus the lower insurance premiums reduce the underwater risk substantially—even in bad housing markets.
Let’s say a homeowner with a $600,000 home has $250,000 worth of equity available. Instead of borrowing the entire $250K, he or she might only be only allowed to borrow $150,000. At the low rate insurance premium, the borrower would end up paying $150 instead of $3000 on the same amount at the 2% rate. And the proceeds of the loan are tax free.
Homeowners who live longer and stay put can borrow less at this lower rate and come out looking OK. Retirees benefit from better cash flow and are not as burdened by the debt service. Here are some of the advantages:
· Adult children don’t have to commit their own assets to caring for parents as they age
· Investors can leave retirement assets untouched instead of having to tap them to bail
out pummeled stock portfolios
· Retirees get cash to fund vacation home or gifts for grandchildren without tapping
retirement assets
· Reverse mortgages eliminate credit market risk
· It’s easier to increase the term and benefits of long-term care insurance
There still may be other viable retirement income options, even with the regular version of the HECM program. This is where retirees need you to advise them on their options and help them select the one that best fits their needs.
Homeowners may want to consult a personal team of advisors, of which you can take the lead. This opens relationship building to next generation family members as well as establishing credibility with external professionals like attorneys. It can be a win-win for your client and for you.
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