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WASHINGTON – The aging baby boomer population is finding a new tool in an unlikely place that allows them to finance temporary cash flow needs – reverse mortgages. As this mortgage solution gains in popularity at a time when credit unions’ purchase origination and refinance volume declines, it may be just the product CUs can use to boost their mortgage business and grow their portfolio. What makes reverse mortgages increasingly popular with seniors, says Callahan and Associates in its new report “Market Update: Reverse Mortgages: An Emerging Mortgage Solutions for the Elderly” is that they allow a homeowner aged 62 or older to convert part of the equity in their home into tax-free income without having to sell the home, relinquish the title or assume a new monthly mortgage page. There is no income or credit qualification or a monthly repayment until the homeowner permanently leaves their home. When the homeowner dies or moves, the house is sold and the reverse mortgage is repaid from the sales proceeds. Unfortunately the reputation of these types of products was tarnished in the 1990s when unscrupulous lenders took advantage of unknowing senior citizens with Shared Equity loan products and steered borrowers into products they weren’t familiar with or well suited for. Nevertheless, reverse mortgages continue to gain in popularity among the senior population. According to the National Council for the Aging, during the first four months of the current fiscal year, 8,700 federally insured reverse mortgages were issued, an increase of 76% from the same period in the previous year. In its report, Callahan provides details of the three types of reverse mortgage products: * The FHA-insured Home Equity Conversion Mortgage accounts for the vast majority – 95% – of all funded reverse mortgages. The HECM limits the risk of loan loss by controlling the amount borrowers can receive. This is done by calculating a principal limit for each loan, which is based on the maximum claim amount, the expected average interest rate, and the age of the youngest borrower. The expected average mortgage interest rate for HECMs is the sum of the mortgage margin, which is determined by Fannie Mae, and the 10-year U.S. Treasury rate in effect at closing. All lenders offering this product must be FHA approved lenders. * The Home Keeper Mortgage is an adjustable-rate loan based on the weekly average of the 1-month CD index as published by the Federal Reserve. Interest adjusts monthly and has a lifetime interest rate cap of 12 percentage points over original coupon, but it will have no per-adjustment caps. Changes in interest rate do not affect the size or duration of payments to the borrower. Loans are purchased at par, and margins and guaranty fees are non-negotiable. * Private lender products that include Shared Equity products and Jumbo mortgages. Ent FCU in Colorado Springs, Colo. is one of the few CUs that offers reverse mortgages. The $1.69 billion CU has been offering the product since 2000 and uses the FHA-insured Home Equity Conversion Mortgage accounts. Ent FCU Chief Loan Officer Bill Vogeny agrees that the growth in reverse mortgages among credit unions has been slow, “but there’s still a lot of potential room for the market to grow exponentially,” he says. “I started following the reverse mortgage market in the mid-1990s when a lot of people saw this as the wave of the future because it would allow people age 62 and over to stay in their homes and not have to move because they needed to downsize due to tax obligations or their cost of living going up faster than their income. But getting the word out about reverse mortgages to potential borrowers hasn’t been as predominant as it should have been. It’s a niche product, but not enough people know about it,” says Vogeny. The Ent FCU executive opines that “people are not looking at reverse mortgages as seriously as they should be.” While most senior members choose to sell their homes and move into smaller residences, “the area for potential growth of reverse mortgages is with borrowers who have an existing mortgages.” Vogeny says Ent has helped several senior members who are still carrying a sizeable mortgage balance. “They are members who underestimated the cost of retirement or refinanced their homes so many times they’ve used their homes as ATMs. They can use a reverse mortgage to pay off their outstanding mortgage balance and relieve themselves of their debt obligation.” Until recently Ent was taking reverse mortgage applications, originating the loans and selling them to Financial Freedom as a way of transferring the risks inherent in risk mortgages such as the property not appreciating in value as expected or the borrower outliving his or her life expectancy, to the ultimate loan holder. Vogeny says the credit union is currently “in between reverse mortgage specialists” and until it staffs up the credit union is handing off all referrals to Financial Freedom. “We want to make sure the product is fairly and accurately explained to the member, and we don’t want to have all our mortgage loan officers selling this product,” says Vogeny. Ent plans to train six loan officers on the benefits of reverse mortgage. In 2003, Ent originated about 20 reverse mortgages, and it typically originates about two each month. Even though reverse mortgages only account for 1.5% of Ent’s mortgage volume, Vogeny says it’s still worth it for the CU to offer the product. Despite the attractiveness of reverse mortgages to seniors, Callahan stresses that CUs should be aware that reverse mortgages because of their structure, offer “substantial risk containment” for CUs and members. “As a precautionary measure, potential reverse mortgage borrowers must receive counseling from industry professionals to evaluate the appropriateness of the mortgage prior to closing,” the report reads. In addition, Callahan emphasizes that “the borrower can never owe more than the value of the property, and the servicer/lender cannot try to confiscate assets other than the property securing the reverse mortgage. Finally, as with any secured mortgages, borrowers who maintain annual insurance and property taxes cannot be removed from the property securing the reverse mortgage.” -

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