New reverse mortgage debuts in high-cost markets

Product lets borrowers tap more home equity
By: Tom Kelly: Inman News
Reverse Mortgage of America, a subsidiary of Seattle Mortgage and the third-largest producer and servicer of reverse mortgages in the country, plans to roll out the first new reverse product in nearly a decade when its privately funded jumbo program - The Lifestyle Plan - hits the market in the next few weeks.

The new product initially will be available in Washington, Oregon and California. It will be marketed to the remainder of the country early next year.

Designed for owners of higher-value homes, The Lifestyle Plan product is similar to Financial Freedom's Cash Account and allows for a higher percentage of available home equity to borrowers, exceeding the federal loan limit placed on reverse mortgages insured by the Federal Housing Administration.

Both the Reverse Mortgage of America (RMOA) offering and the Financial Freedom mortgage function similarly to the FHA Home Equity Conversion Mortgage (HECM) and Fannie Mae HomeKeeper reverse-mortgage programs, but are funded by a third-party lender.

The Lifestyle Plan could be more beneficial than the HECM for homeowners with substantial equity. For example, a HECM would provide a typical 73-year-old couple with an appraised home value of $700,000 with approximately $203,723 in available funds. Under The Lifestyle Plan this same couple could avoid closing costs and loan fees, netting $291,915 in available funds, a difference of $88,192, according to Reverse Mortgage of America.

"The Lifestyle Plan provides additional opportunities for seniors across the nation, particularly those in expensive housing markets, who are eagerly seeking alternate sources of income," said John Nixon, executive vice president of Reverse Mortgage of America. "It is important that seniors understand and fully examine their financing options. As our population ages, reverse mortgages will supplement retirement and enhance the quality of life for many more senior homeowners."

Financial Freedom first introduced a jumbo reverse mortgage in 1996 and had no competition until now. Jumbo amounts, now starting at $417,000, adjust annually and are greater than the "conforming" limits established by Fannie Mae and Freddie Mac.

The interest rate on the new RMOA program is the six-month LIBOR Index, plus 3.6 percentage points. That rate today would be 9.02 percent, compared with 5.07 percent three years ago. While the new RMOA program's "margin" is slightly higher than the Financial Freedom mortgage (3.6 compared with 3.5) the RMOA mortgage offers a more flexible no-fee option.

Most seniors prefer predictable, reliable mortgages. Many have requested a fixed-rate reverse to the unpredictable moves of an adjustable, but underwriters have been unwilling to take on the risk of a long-term product.

Tom Scaberti, who left Financial Freedom last year to head up the soon-to-be-released reverse mortgage at Countrywide Home Loans, said it has been difficult for potential mortgage investors such as Lehman to commit to gauge how long seniors will remain in the home. That information, plus other research, would bring more mortgage variety and result in lower rates and fees for consumers.

"There are actuarial tables, like the ones insurance companies use, to predict how long a senior will live," Scaberti said. "But we don't have a lot of data yet on the move-out rate. How long will they stay once they get the reverse?"

FHA's HECM is clearly the nation's most popular reverse mortgage and carries a lower interest rate than the jumbo products, but borrowers are limited in the amount they are able to borrower by FHA's loan ceilings and geographic regions. Urban areas typically have higher loan ceilings than rural areas. Borrowers have to pay HECM loan fees, typically 2 percent of the appraised value plus a 2 percent mortgage insurance premium, but these fees can be subtracted from the loan proceeds. Thus, borrowers do not have to pay "out of pocket" for most of these fees.

Reverse borrowers make no monthly payments on their mortgage during its term. The loan comes due when the borrower permanently moves out of his or her home. To qualify, consumers must be at least 62 years of age and own their own home. The home does not have to be paid off entirely, but the greater the equity, the greater the reverse loan amount.

However, seniors can "outlive" the value of their home without being forced to move. The homeowner cannot be displaced and forced to sell the home to pay off the mortgage, even if the principal balance grows to exceed the value of the property. If the value of the house exceeds what is owed at the time of the homeowner's death, the rest goes to the estate.

Tom Kelly's book "The New Reverse Mortgage Formula" (John Wiley & Sons) is now available in local bookstores and on Amazon.com. He can be reached at news@tomkelly.com.