Appraisers' Free Forum

Mentor, since you volunteered, can you give us a little discussion of reverse mortgages, and tell us a little about how they work, and maybe what swindles could be introduced into the process?

Jim Plante wrote:Mentor, since you volunteered, can you give us a little discussion of reverse mortgages, and tell us a little about how they work, and maybe what swindles could be introduced into the process?

I don't know of any swindles in recent times, but I'll try and think up a weak spot for you to consider

The FHA Home Equity Conversion Mortgage is the most popular product. Probably 90% of RM's are HECM. The AARP site has a reasonable calculator that compares the HECM and the Fannie product. WF, my current employer, has a great site and info, but, Jim, I know you would prefer optional sources as well, presumably disinterested:)

A fee simple owner of RE 62+ years old is eligible for a HECM. There is no credit qualifying and no income qualifying. It is an equity & age consideration only. I don't have time for a detailed presentation, since I am still swamped with on-boarding tasks along with some applications I have to move forward tonight and tomorrow.

In a nut shell: The best program for people of sound mind and health & over 62 that cannot see the need to move for several years may well be the line of credit. The line of credit can be converted into a fixed payment to the owner to supplement cash flow, but the part of the line of credit that is unused, grows at the interest rate of the note plus 1/2%. Right now that is about 6.5%. If someone owned their home free and clear and it was appraised at $200,000, if they were 75 years old, they could close a HECM and have no house payment other than taxes and insurance, plus a line of credit of about $122,402.

If they didn't draw down on the line of credit, in 5 years, it would be $167,334. If they waited until they were 80 to get the RM, they could only get $133,225 assuming the same MV for the home and same interest rate. You can see that someone that maintained relatively good health would have a line of credit exceeding the original appraised value somewhere around year 8 (making a lot of interest rate assumptions). The MV of the home could stay the same, fall, or rise. Their line of credit is hooked to the 1 year T rate plus 1/2 Basically, their goal should be to be upside down in the loan and still live in the home.

They sign a non recourse note. The only recourse, if upside down is to sell the home at a loss and recover from the FHA insurance pool. The estate doesn't get tagged with anything. If the owner is upside down and chooses to move into an apartment or in with relatives, there is no adverse credit consequence and no adverse financial consequence.

The biggest risk is that someone becomes infirm and blows the equity in Vegas, decides they can't stand their neighbors, stuff like that.

Possible scams??? I suppose, a RM originator could try and corrupt the counselors that have to be involved in the process. They are HUD trained counselors that work for charitable entities. Usually family members are involved. It would have to be one complex conspiracy after another. WF really screens their RM originators well, and, the regulatory environment is ever present. Also, I think it is an area where I think most LO's would turn someone in in a heart beat, if there were notable abuse. I believe it is effectively self-policed. The gray zoners can pull crap, as always. What can you do?

Another possible weak spot would be influencing of appraised value. WF has really been pretty firm about separating origination from the appraisal function. Want to get a WF HMC fired? Document attempted appraiser abuse/undue influence. If any old MB is allowed to market the HECM's, I believe there would be too many bad actors. My prior employer was squeaky clean for a MB, and they were let into a pilot program for HECM RM, but only a year ago. It is coming, and I hope the lenders offering this through their wholesale channels don't let it spin out of control.

Thanks, Mentor.

Let's say I take out a HECM for $122K on a $200K house. I don't draw down the credit line at all. Ten years from now, my credit line is $220K (never mind the actual numbers for now). I realize my lifelong dream: I get killed by a jealous 20-year-old in a cathouse knife fight.

Is that 220K now part of my estate? Can I pass it on to my heirs? Because the house is now worth only about 135K, since I haven't maintained it.

Jim Plante wrote:Thanks, Mentor.

Let's say I take out a HECM for $122K on a $200K house. I don't draw down the credit line at all. Ten years from now, my credit line is $220K (never mind the actual numbers for now). I realize my lifelong dream: I get killed by a jealous 20-year-old in a cathouse knife fight.

Is that 220K now part of my estate? Can I pass it on to my heirs? Because the house is now worth only about 135K, since I haven't maintained it.

I can verify the actual answer tomorrow, and will come back and edit, if necessary. I believe the untapped LOC goes to the estate, will check. This much, I am sure: If you had a premonition about the event and wrote a check on the line of credit, transferring the whole amount into a bank account you control, it is yours, if you survive and part of your estate, if you don't survive the knife fight.

If no prior use of the line of credit (original closing costs were paid out of pocket), the home might net 120K after selling costs and minor fix up costs (convenient math). Then the note holder gets the 120k net proceeds and is reimbursed the remaining 100K from the FHA MI fund.

Technically, the RM borrower agrees to reasonably maintain the home and pay taxes & insurance, so fix up should be cosmetic. How the heck are "interior condition" police going to enforce that provision?? I can see a reported building inspection violation being cured via a draw down of a line of credit, but I can't imagine the politics of forcing some RM holder that spent all the available funds out of their home due to inability to repair a roof, for example. Look for partial claim on the insurance fund as a likely solution. I have heard that NO HECM in the country has ever been foreclosed to date. Always a work out, apparently.

Multiple property owners can be on a RM, and the survivor could still live in the home, of course. When the RM is originated, the loan, life payment and/or line of credit available is based upon the age of the younger applicant. Sometimes it is wise (or necessary, if under 62) for the younger spouse to quit claim off title, if there is a significant age discrepancy.

Mentor quote: "I can verify the actual answer tomorrow, and will come back and edit, if necessary. I believe the untapped LOC goes to the estate, will check."

I checked and that is correct. The estate gets the LOC balance What a product!! (in the right circumstances)

The only thing that holds it back is the FHA loan limit and difficulty in marketing the product.

The conventional reverse mortgage offerings are springing up here and there. However, they offer solutions for people with equity needs that exceed the FHA limits. Most of those programs don't seem to make sense for homes in the FHA range....maybe worth a look if the applicant is 80+.

I can no longer do RM, even though I have the training through a pilot program and supplemental courses I took. It is my choice. I could only do RM as a specialist and therefore no other products. Some days it is appealing, since it is a longer term, higher quality relationship than a transaction/deadline driven situation.

Thanks for following up, Mentor. That program sounds pretty appealing, and I'm in the age range.

Jim Plante wrote:Thanks for following up, Mentor. That program sounds pretty appealing, and I'm in the age range.

I can't do it myself, but I can refer you to one of two specialists that are within butt kicking distance of me:) Let me know if you want a contact. I am in a position to monitor things, in the highly unlikely event it would be necessary. I worked with & in the adjacent office to both of these guys up until I had my 4.5 year stint with the MB.

The FHA rate is based upon one of two short term treasury indexes and are set nationally. The monthly index is the best bet, IMO. Allowed closing costs are specified...FHA way or the highway. Two point origination fee and abut a $30/Mo maintenance fee. Up front mortgage insurance plus .5% monthly MI, but who cares? The .5% applies only to utilized balances and upside down is good for the borrower and the character of their potential heirs.

For people in the right situation, the most relevant question is Where do I sign?

Mentor wrote:<snip>
I checked and that is correct. The estate gets the LOC balance What a product!! (in the right circumstances)

The only thing that holds it back is the FHA loan limit and difficulty in marketing the product.

The conventional reverse mortgage offerings are springing up here and there. However, they offer solutions for people with equity needs that exceed the FHA limits. Most of those programs don't seem to make sense for homes in the FHA range....maybe worth a look if the applicant is 80+.

I can no longer do RM, even though I have the training through a pilot program and supplemental courses I took. It is my choice. I could only do RM as a specialist and therefore no other products. Some days it is appealing, since it is a longer term, higher quality relationship than a transaction/deadline driven situation.

Then I guess Jim had better stay away from cathouses with 20 year olds for a while.