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By viewing HECM products through a more holistic lens, mortgage originators may discover that forward and reverse mortgage strategies have more in common than they previously believed. In fact, these products often work
best in harmony with one another.
As with first-time homebuyer loans, HECMs are not meant for
everyone, and the borrowers who use these programs often need a
little extra information to make sure they understand all the nuances
of their mortgages. Originators who fully understand the financial
ramifications, product flexibility and educational needs of HECMs —
themes that are common to all loan products — can better serve
borrowers from their first house to their last.
Although the HECM hasn’t always had the best reputation, it is now
safer than ever. Much of its past notoriety stemmed from the mistaken
belief that a reverse mortgage was best used as a “loan of last resort”
to keep seniors in homes they could no longer afford to maintain or,
worse, as a windfall to buy a yacht or dream vacation. Unfortunately,
some borrowers got HECM loans they didn’t understand, didn’t need
or couldn’t afford.
It is true that HECMs are exempt from the TRID consumer-disclosure
regulations and Qualified Mortgage (QM) rules, but they are subject to
their own policies designed to verify the borrower’s financial capacity
and willingness to comply with loan requirements. Moreover, three
key regulatory changes over the past four years virtually eliminated
past risks for HECM lenders and borrowers.
First, the U. S. Department of Housing and Urban Development (HUD)
set limits on how much borrowers can draw at closing or during the
first 12 months following closing. Under the new limits, most HECM
borrowers access no more than 60 percent of their principal limit during the first 12 months. Lump-sum draws in excess of 60 percent of the
maximum loan amount are supported only in special circumstances,
such as when a borrower needs to pay off an existing mortgage
or federal debt.
HUD also added protections that enable qualified non-borrowing
spouses to continue occupying the home and defer loan repayment
when the borrower has passed away. Perhaps the most significant
change, however, was the addition of new Financial Assessment rules
to ensure HECMs are offered only to financially qualified borrowers.
HECM lenders now must review a borrower’s credit history, income,
assets, debt and history of paying property taxes, insurance and
homeowners association fees. If a lender determines the loan will not
be sustainable, it can either deny the application or establish a life-expectancy set-aside (LESA). This is equivalent to an escrow account
in traditional mortgage lending and is used to pay the borrower’s
taxes and insurance.
The Financial Assessment rules have cut tax and insurance defaults
on HECMs by more than 70 percent and serious defaults by almost
65 percent, according to data compiled by New View Advisors.
Nearly four in 10 single-family homes were sold to first-time home-buyers during the first quarter of 2017, an 11 percent year-over-year
increase, according to Genworth’s First-Time Homebuyer Market Report.
More than three-quarters of these borrowers made their purchases
with a low-downpayment product, with close to half of those choosing
a Federal Housing Administration (FHA) low-downpayment loan.
In response to this trend, many national mortgage companies now
offer zero-down loans for first-time buyers, who skew young and tend
to have a lot of debt and not much in the way of assets. Originators
can add the HECM as a way to extend this philosophy of “meeting
borrowers where they are” within their borrowing lifecycle.
Just as FHA first-time homebuyer programs are designed to serve
the special needs of younger borrowers, the FHA-insured HECM is
specifically designed to serve homeowners who are 62 years of age
and older. Together, these products are the ideal bookends to a generational lending approach that creates repeat business by adapting
to borrower needs as they change over time.
Much like first-time homebuyers, retirement-age borrowers have
unique characteristics. Older borrowers are likely to have more assets
than first-time borrowers, so up-front loan costs are not as big a hurdle.
On the other hand, retirees are highly motivated to protect their accumulated assets to ensure they can pay for a long and comfortable
retirement. In addition, many retirement-age homeowners are living
on reduced or fixed incomes, so loans with low or flexible monthly
payments are a plus.
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