2017 New Reverse Mortgage Gets Positive Review?
Guest Author: John A. Krochman | Branch Manager – NMLS# 278683 | Broadview Mortgage Corporation
Cell / Text 714-906-4357 | firstname.lastname@example.org
First Impression of New Reverse Mortgage
If you have been following the news with reverse mortgages you likely know that October came with a shift in policy from Washington.
These changes include the Mortgage Insurance Premiums (MIP) which safeguards the program, and reducing Principal Limit Factors (PLF) which determines how much home equity can be borrowed (a measurement determined by the age of the youngest homeowner combined with the amount of interest being charged for the loan).
It’s difficult to determine in advance the full effect of policy changes, but after three weeks under the new rules, we have seen a modest look at the “New Reverse Mortgage.” And it looks very attractive.
I believe the program will have finally earned its way into the mainstream as a widely accepted financial product, shedding some of the negative press of reverse mortgages past.
This is positive news as the baby boomer generation graduate’s an estimated 10,000  people per day into the retirement age group. These levels of folks entering retire age is projected to last well into year 2030.
It is no secret that over half of the baby boomer generation has less than $100,000 set aside for their retirement years. Albeit, homeowners who are over 55 today, control about two-thirds of the nation’s home equity according to FreddieMac  and about 63% of them prefer to age in place.
Aging in place continues to be cited as the most attractive prospect among those considering a reverse mortgage.
Mortgage Insurance Changes Long Game
The changes in the MIP are across the board and are now the same rate for all borrowers. The new rate of 2% is based on the maximum claim amount and is charged to the borrower on day one. This amount is normally added to the starting loan balance.
The 2% rate is a significant increase for about half of would be borrowers under the program and the other half will enjoy a slight decrease. The most positive change in the MIP is the annual rate which has been sharply reduced from 1.25% to just .50%.
Of course, the main benefit of the changes to the MIP is the balancing of the HECM insurance fund which is managed by the Department of Housing and Urban Development (HUD).
Currently, the fund is deep in red ink, which if not corrected, could jeopardize the entire reverse mortgage program. Most of the projected losses are based on the home price discount rate which occurs when the last living homeowner permanently leaves the home and the property is transferred to their heirs.
The adjusted insurance rates along with some modifications in the PLF are expected to improve the overall viability of the program, and that is a big positive for the flood of retirees who will look towards their equity to help supplement retirement.
Will Reverse Mortgage Costs Come Down?
The changes to the PLF have a much greater impact on new borrowers. Essentially, the amount of money a new reverse mortgage applicant can borrow from the equity in their home has been reduced across the board with the exception of folks who are slightly older and thus expected to use less of their equity over time.
There is a “silver lining” to the new limits. Foremost, the new PLF’s helps protect the insurance fund as a whole. This may ensure the longevity of the program without the need for taxpayer bailouts.
But the real story here may actually come as a result of a very competitive mortgage market.
This is because the amount of money a borrower spends to acquire a new mortgage and amount that is paid in interest is an expense that offsets the equity and future equity for the homeowner.
The more that is paid in fees and interest the less equity is available for the homeowner to leverage or “cash-in” when the home is sold. Most homeowners will shop around for the best deal and receive loan estimates from at least two different lenders.
But prior to the October changes, the reverse mortgage market was pretty flat with many lenders offering the same rate and fees.
This is about to change for two main reasons.
First, the New Reverse Mortgage is attracting mainstream mortgage companies who now seek to enter the reverse mortgage market. Previously many lenders would shy away due to the negative perceptions of offering the program.
Before the program was first revamped in 2015 and now further shored up this October, there was a greater likelihood a homeowner could be foreclosed and evicted from their home for failing to keep up with their property taxes, homeowner’s insurance, association dues, and in some cases maintenance of the home.
Second, with more choices, lenders will compete more fiercely for business which will drive down fees and interest rates across the board. This will be a big win for the future reverse mortgage consumer and a sign of greater acceptance of the reverse mortgage program as a whole.
The New Reverse Mortgage is Safer
While borrowers can still fall into default and lose their home by failing to keep up with their financial obligations on the home, the 2015 Financial Assessment rules require that applicants qualify based on the ability to keep up on those payments.
Homeowners who don’t qualify, have the option to accept a reverse mortgage with a Life Expectancy Set Aside (LESA) which sets aside a portion of the equity in the home to ensure the payments are made.
Also, the new PLF’s help by reducing initial draws effectively preserving equity in the home for future needs. As the average life expectancy increases over time, the new factors are more in line with the expected longevity of the population.
Bottom line is that the “New Reverse Mortgage” is indeed, a new and improved version of a financial product that has received added recognition over time. With these recent improvements, the program is safer and garners a greater acceptance from the mainstream.
The first impression is very positive.
Get Your Questions Answered
I would like to extend a special thank you to John Krochman for this great article. If you have questions about this article and would like to contact John directly, you can email him at email@example.com, or text/call him at 714-906-4375.
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