Pfau Makes Case for Emergence of Reverse Mortgage

The prevailing reputation for reverse mortgages in our society is not healthy.  Stories of elderly abuse, high fees, and financial deceit are wrapped into the memories of many of our nations aging population.  However, over the past few years the Department of Housing and Urban Development has significantly overhauled the program by instituting measures that prevent financial abuse and reduces the fee structure on these loans.

Over the past couple years I have studied the reverse mortgage programs and given my financial planning background have recognized that the reverse mortgage could help solve many of forecasted problems with underfunded retirement plans by eliminating a mortgage payment for many Americans in retirement (studies show that today’s baby boomers are entering retirement with more debt and less retirement savings than any other age cohort in our history).

Wade Pfau, a personal financial planning expert who often contributes to the Journal of Financial Planning, wrote a piece back on November 30th for the Wall Street Journal making the case for how the reverse mortgage can help household bridge the financial gaps in retirement.  SEE HERE to read the entire piece.

If you have any interest in retirement planning then its worth a read.

Great article on end of life planning for reverse mortgages

Kiplinger Magazine posted a great piece last month entitled, “What Heirs Need to Know About Reverse Mortgages“.

HEIRS TO AN ESTATE WITH A REVERSE MORTGAGE SHOULD BE FAMILIAR WITH END OF LIFE DETAILS.
HEIRS TO AN ESTATE WITH A REVERSE MORTGAGE SHOULD BE FAMILIAR WITH END OF LIFE DETAILS.

Here are a few of the key points that I think consumers considering a reverse mortgage should take into account:

  • At the death of the last borrower, though, adult children and other nonspouse heirs must pay off the loan. They can keep the property, sell the property or turn the keys over to the lender.
  • The good news for heirs is that reverse mortgages are “nonrecourse” loans. That means if the loan amount exceeds the home’s value, the lender cannot go after the rest of the estate or the heirs’ other assets for payment.
  • When the last owner dies, the estate’s executor should contact the lender.  Loan proceeds disbursed as monthly payments will stop. If the borrower took a line of credit, that line will be closed.

If any equity exists in the home and the heirs elect to sell, the estate will receive the equity after the loan and other settlement fees are satisfied.

Will subprime mortgages make a return?

You can file THIS ARTICLE in your ‘proof that humans have short-term memories’ file.  Alyse Rzemek of themreport.com is reporting that there are a few companies out there raising capital with the hopes of making loans to applicants who don’t qualify for conventional mortgages.  Fortunately one company is going to at least require a minimum of 15% down.  We’ll have to see what develops.  I thought that at some point in the future lenders would create a product to serve the “non-prime” community but I didn’t have any inclination that it would be this soon.

Fannie Mae HomePath Summary

If you’re curious to learn about Fannie Mae’s special Homepath loan product I have put together a quick summary of the program.  If you haven’t heard of the HomePath mortgage product it is a program put together by Fannie Mae to help unload some of the homes they have taken possession of through foreclosure.  It has a few nice features to make it easier for homebuyers to buy the homes.  Here are the pro’s and con’s of the program as I see them:

Pro’s

  • Allows for a minimum of 3% down payment (although the closing costs are much higher compared to a 5% down payment)
  • Allows the seller to pay all of the buyer’s closing costs
  • No mortgage insurance even with less than 20% down payment (however, the interest rates are higher)
  • No appraisal needed as a part of the underwriting process

Con’s

  • The property must qualify as a HomePath eligible home. Only Fannie Mae foreclosed homes are included in this list so the supply of homes are limited. You can search homes HERE.
  • Rates are about .50%-.75% higher than standard conventional mortgages

Other

  • HomePath also offers a renovation loan similar to the FHA 203K product (you can read more about FHA 203K HERE).

Depending on the buyer’s financial qualifications a standard conventional mortgage can often be a better option.  If you’d like to evaluate your options please contact me today!

Alt’s to reverse mortgages

I got an email over the weekend from Terry Donahe, CFP(R), a financial planner in Lake Oswego and instructor at the University of Portland Pamplin School of Business.  He has put together THIS ARTICLE discussing alternatives to reverse mortgages.  It is a valuable read if you have thought about such a program.

Expansion of Jumbo loans may be on the horizon

The WSJ published this article on Monday in which they report that investors’ appetite for risk is growing.  This is evident in the fact that many Wall Street firms are re-introducing complicated debt instruments to the marketplace.  Although this may sound like a risky proposition it may be a good sign for those stuck with mortgages greater than $417,000 who are unable to refinance.  This is because over the course of the past couple years jumbo financing (loans > $417,000) has been extremely limited as investors were not willing to buy mortgage-backed bonds that were not secured by the government (Fannie Mae, Freddie Mac, and Ginnie Mae).   As a result, lenders offering jumbo loans were usually banks and savings & loans institutions who kept the loans on their own books. Due to their risk exposure underwriting has been restrictive and interest rates for these loans have been substantially higher.

Now that Wall Street is beginning to see expansion in risk taking again this may result in lenders packaging up jumbo mortgages and selling them to investors.  If this happens I expect some more competition in the jumbo space which means the terms on these loans should improve and the underwriting requirements should ease from the current conservative levels.

Elimination of interest-only fixed rate loans

In another sign of the times Wells Fargo announced today that they were eliminating their 30 year fixed mortgage with interest-only payments for the first 10 years.

Because Wells Fargo is a bellwether in our industry other lenders are expected to follow suit.

Shared equity loans don’t seem like a good deal to me

Kenneth Harney wrote this article on the Washington Post regarding shared equity loans (I’m not even clear if this is the correct name for this).

From the sounds of it the loan would work kind of like a reverse mortgage where the lender would make a loan collateralized by equity in a home.  But instead of collecting interest in the form of monthly payments or through negative amortization (interest accrued that is added to the loan amount) the lender would instead take a cut of the equity in the home when it is sold in the future.

I’m pretty skeptical of this one.  On the surface it sounds like another way for lenders to appeal to undisciplined consumers who like the idea of not having monthly payments much like the negative amortization loans did during 2004-2007.

There are legitimate applications for this type of loan but I would advise that consumers consult with a financial professional they can trust before signing the dotted line.

Additional links-

WSJ.com article on “shared-appreciation” loans

Reverse Mortgages and the 2008 Housing Bill

As I’ve written about multiple times in this blog the 700-page 2008 housing bill has many differnet provisions embedded in the law.  Although I don’t do a lot of reverse mortgage business I wanted to at least provide a link to an article which summarizes how these loan products were impacted by the 2008 housing bill. 

Here is a link.

FHA Loans- What Real Estate Professionals Needs to Know

History

In 1934, the Federal Housing Administration (FHA) was formed as a part of the National Housing Act.  The objective of the FHA was to increase home construction, reduce unemployment, and operate various loan insurance programs.  (It’s important to note here that the FHA DOES NOT directly lend money for FHA loans.  They only provide the insurance that protects lenders against losses from making FHA loans.  The FHA’s insurance makes the origination of FHA loans more attractive for lenders and reduces the rate of interest which is charged on these loans.)

 

Since its inception the rules and regulations that guide FHA loans have been modified several times however the main purpose has remained relatively consistent- to enable low to moderate income Americans to buy homes that they would unlikely qualify for under conventional loan programs.

 

FHA loans have become more prominently used in the recent few months because of the various underwriting flexibilities that conventional loans do not have.  Many of these flexibilities used to be found in ALT-A & subprime mortgage programs but because of the credit collapse these loans are no longer available.  

 

FHA Loan Limits- (As of August 7, 2008 for Portland/ Metro area)

 

1-unit: $418,750

2-unit: $536,050

3-unit: $648,000

4-unit: $805,300

5-unit+: not available

*Loan amounts above $362,790 will likely carry interest rates that are .25%-.50% higher than FHA loan amounts below this level.

*Click here to be taken to the HUD webpage to see other areas.

 

Down Payments

Traditionally FHA loans have required a minimum down payment of 3% on the part of a home-buyer.  Here are a few facts about the down payment you would want to be aware of:

 

2008 Housing Bill: As a part of the 2008 housing bill that recently passed into law FHA minimum down payment requirements will increase from 3.00% to 3.50% (effective January 1, 2009). 

Gifts: The home-buyer may receive a gift from a relative or non-profit organization to satisfy their down payment requirement (most conventional programs require at least 5% to come from the borrower’s own funds).

Seller Financed Down Payment Assistance:  Up until October 1, 2008 home buyers were able to have the seller indirectly “gift” the minimum 3% down payment to the buyer using a loophole in the FHA underwriting guidelines which effectively created 0% down financing (the “non-profit” organizations behind this loophole were Ameri-dream, Nehemiah, etc.).  However, do to the poor performance of these loans the 2008 housing bill eliminated this loophole.  (At the current time a group of congressman are trying to reinstate seller financed “DPA”s through HR Bill 6694 but according to my sources passage of this bill is doubtfull.)

 

FHA Modernization

Over the last year significant improvements have been made to the “usability” of FHA loans.  Here are a few of the highlights that real estate professionals should be aware of:

Inspections: It used to be that bank underwriters would require pest & dry rot reports, well-flow tests (when applicable), and septic reports (when applicable) for ALL FHA loans.  However, these are no long needed UNLESS the earnest money agreement specifically states that these inspections will be done during the inspection process.

Appraisals:  FHA loans used to have their own appraisal format which was much more detailed and cumbersome than conventional appraisal requirements.  For example, under the old appraisal guidelines plants and shrubs had to be trimmed back from the dwelling by 6 inches or more.  However, bank underwriters now only require the standard appraisal (AKA “1004” or “form 70”) with a little bit more information. 

“Junk Fees”: It used to be that there were certain standard closing costs that the FHA deemed “junk fees” and would not allow the home buyer to pay.  These requirements have been eliminated however the loan originator may not charge more than 1% origination fee.

 

Miscellaneous Benefits & Features of FHA loans

Seller concessions: With FHA loans the seller may pay up to 6% of the sales price towards the home-buyers settlement charges (conventional programs where the buyer is putting <10% down only allow for 3%).  The additional contribution can be used to by down the home-buyer’s interest rate among other items.

Minimum down payment on multi-family:  FHA is one of the only programs I am aware of that will allow for up to 97% financing on 2,3, and 4 unit properties so long as the home-buyer is going to occupy one of the units as their primary residence.  (Conventional loan programs typically require 25% down on owner-occupied 3 & 4-unit properties.)

Non-occupying co-borrower: Even with the relatively flexible underwriting guidelines that FHA allows many borrowers will not qualify.  In this case a home-buyer may call upon a “co-signer” to apply for the loan so long as the person is a relative.

No credit history: Even borrowers with no credit history MAY still qualify for FHA financing through the creation of a “non-traditional” credit report.

 

Paperwork

Even though the FHA loan program has improved significantly over the past few months there is still an overwhelming amount of time-sensitive disclosure paperwork which needs to signed by various parties in the transaction.  It’s important that you work with an experienced loan originator who has a handle on all the disclosures and when they need to be signed to avoid any pesky delays in the funding of the loan.

 

The real estate professional really needs only to be aware of one FHA disclosure.  This is the Amendatory Clause & Real Estate Certification which MUST be signed by the buyer(s), seller(s), listing agent, and selling agent ON THE SAME DATE as the earnest money agreement is signed. 

 

For a copy of a blank Amendatory Clause & Real Estate Certification form email myself or google the term and you will likely find one.

 

I hope you found this informattional useful.  I would invite you to post any comment you may have regarding this article below.  Furthermore, if you know of other profeesionals that would benefit from this posting please pass it along!