WASHINGTON — The reverse mortgage industry is looking for 2016 to be a comeback year after recent reforms by the Federal Housing Administration and winning newfound respect from financial planners.
Since the housing crisis, the industry has been largely dependent on the FHA's reverse mortgage product. Over the past four years, originations of Home Equity Conversion Mortgages have been stuck below 60,000 a year as lenders implemented new FHA regulations designed to make the product safer for seniors and more financially sound. With the implementation now behind them, lenders are hoping for a change.
"It is a much better product," said Mike Kent, president of Liberty Home Equity Solutions, a subsidiary of the mortgage servicer Ocwen Financial Corp. "It is safer for the consumer" and safer for the FHA Mutual Mortgage Insurance Fund.
The changes to the adjustable-rate HECM program make it fairly competitive with home equity lines of credit — and an unusually high number of HELOCs are coming to term.
"This allows the borrower an option to get a loan that looks a lot like a HELOC but without the monthly payments," Kent said.
Additionally, the unused portion of an HECM line of credit grows every year, as with a savings account.
"When we educate the borrower and lay out the advantages of an adjustable-rate HECM, the choice between a HELOC and an HECM is pretty clear," Kent said.
One of the most significant recent reforms involves financial assessments, which require FHA lenders to evaluate the borrower's net residual cash flow, credit and collateral. Previously, the Home Equity Conversion Mortgage underwriting was based strictly on the collateral value of the home.
Under the financial assessment, lenders have to determine whether the borrower can afford to remain in the home and pay their homeowner's insurance and property taxes.
In the wake of the housing crisis, many seniors took out reverse mortgages to prevent foreclosures. But some used so much of their home equity to pay off their existing mortgage that when they later ran into financial problems, they ended up in foreclosure because they couldn't pay their taxes and insurance. Under the terms of FHA-insured reverse mortgage, the homeowner remains responsible for paying taxes and insurance.
Lenders completed the implementation of the new financial assessment during the summer, with the results just starting to show.
"The fourth quarter was the first real financial-assessment quarter," said Gregg Smith, president at One Reverse Mortgage in San Diego. "We feel really good about production going forward."
Reverse mortgage lenders are optimistic because it appears the FHA is satisfied with the reforms it made and lenders can now concentrate on growth. They are also in a positive frame of mind because of the demographic trends. Many baby boomers have a lot of equity in their homes but are not prepared financially for retirement.
Every day an estimated 10,000 baby boomers turn 62, which makes them eligible for an HECM. And nearly half of homeowners over 55 have paid off their mortgage.
"Most folks coming to us have very little mortgage debt, but they want to have the ability to access the equity in their home in the future," said Smith, who founded One Reverse Mortgage in 2001. It was acquired by Quicken Loans in January 2008.
Another plus is the FHA adjustable-rate HECM is beginning to attract the attention of financial planners, according to Wendy Peel, vice president for sales and marketing at ReverseVision, which is based in San Diego.
"Financial planners are really starting to understand how to model this product and when it makes sense to use it," she said.
For example, seniors can tap an HECM line of credit to defer signing up for Social Security. By waiting a year or two, they can collect higher annual benefits. It can also help in managing an investment portfolio so seniors aren't forced to sell into a falling stock market. Seniors can take draws when they want and not pay the draws back unless they want to.
"That is why it is an incredible financial planning tool," Liberty's Kent said. "It is better to have it and not need it than need it and not have it."
The unused portion of a reverse mortgage line of credit continues to grow, with interest rates usually adjusted annually. As a result, those funds will grow faster in a rising interest rate environment.
Seniors can still apply for a fixed-rate HECM to meet an immediate need for a large amount of cash. But currently, the FHA limits lump-sum payouts to 60% of the available funds during the first 12 months. As with all HECM transactions, the borrower has to pay off the existing mortgage before pocketing any cash or placing it in a reverse mortgage line of credit.
At Liberty, about 75% of HECM originations are adjustable-rate and 25% are fixed-rate.
According to the Department of Housing and Urban Development, lenders originated 57,990 HECMs totaling $16.1 billion in fiscal year 2015, which ended Sept. 30.
"I do see the HECM market growing and really skyrocketing over the next three to five years," Peel said.
About 60%-70% of HECM loans flow through ReverseVision's loan origination systems. "We have seen in the last several months an increase in application volumes," she said.
Meanwhile, "banks and credit unions are coming back to the reverse mortgage market," she added. "The baby boomer is still their best banking customer" and those institutions want to serve boomers as financial advisers.
Over the past two to three years the FHA has worked toward making HECMs a "mainstream product," according to Reza Jahangiri, chief executive of American Advisors Group in Orange, Calif., the largest reverse mortgage lender in the U.S.
"The changes FHA has made created more tailwinds and less headline risk," he said.
But Jahangiri said he expects it will take time before the product really gains acceptance with financial planners and he doesn't expect to see a jump in originations this year.
"It is still early in the curve because of the lack of awareness of this product and how it actually works," Jahangiri said.
He said that, while the big banks exited the reverse mortgage business post-crisis because of the tax and insurance foreclosures and other headline risks, he expects they will be re-entering the business soon.
"Some community banks sell to us and it is a good product for them," Jahangiri said.