The economic downturn has hit a lot of boomer credit union members especially hard in their retirement accounts, but executives familiar with reverse mortgages say the product can be a useful tool to help those members salvage retirement plans.
A reverse mortgage converts the equity in the members home into cash without a monthly payment obligation, according to the MEMBERS Trust Co., an investment CUSO that helps credit unions offer the loans. No repayment is required until the final borrower sells the home, moves or passes away.
MEMBERS Trust helps its credit union clients with the application, underwriting and servicing of reverse mortgages.
“A reverse mortgage is much the same as a forward mortgage but just in reverse,” explained Tom Walker, president of Members Trust. The CUSO provides back-office support for 13 credit unions to offer reverse mortgages. “There are some other differences of course, but the fundamental product is that simple to understand.”
The first difference is that reverse mortgages are limited to borrowers who are 62 or older, a fact that targets them pretty firmly at credit union members getting close to retirement age, Walker explained. The second is that they have sufficient equity in their homes to make a reverse mortgage an attractive option for them.
“Reverse mortgages aren't for everyone,” Walker said. “But they are a good option for older credit union members who have lived in their homes for a while and who face a shortage of available cash for retirement or for increased medical costs or other charges.”
A second key reverse mortgage difference is that in reverse mortgages the borrower retains title to the home and cannot be evicted from the home even if the borrower ends up receiving more than their equity in the home. This means reverse mortgages work a good deal like an investment annuity in that it can effectively provide income for the borrower for the balance of the borrower's life or until the borrower moves out of the home.
Should the borrower wind up remaining in the home for longer than the available equity lasts, they will still not lose their home. Instead, provided the reverse mortgage is a home equity conversion mortgage, a type of reverse mortgage insured by the Department of Housing and Urban Development's Federal Housing Administration, FHA insurance will cover the additional expense for the credit union.
Walker explained that these differences have made reverse mortgages attractive as means for doing things like paying off an existing mortgage, repairing or weatherizing a house to make it more energy efficient or paying tax bills that could otherwise force a property sale.
The mortgage, closing costs and fees have to be to repaid after the borrower dies or moves out of the home, but this can be done with the other proceeds of an estate such as insurance, other investments or the sale of the property, Walker said.
“Where reverse mortgages can be useful at this particular time is for older Americans who had plans to retire only to see their investment portfolios decline to where they couldn't otherwise retire when they wanted,” Walker said. “A reverse mortgage can help them retire when they planned to.”
Jon Paukovich, vice president of Mortgage Lending for the $3 million Ent Federal Credit Union, headquartered in Colorado Springs, Colo., reported that Ent had been offering reverse mortgages since 1999. Ent sees reverse mortgages as an important element of its offering to older members who are often among its largest depositors and longest members.
“Some of these people have been members of ours for years,” Paukovich said, “now at this time of their lives, we don't want them having to go off to a bank to get access to this product.”
Paukovich reported that Ent had been attracted to the HECM type of reverse mortgages, those which were insured by FHA, because they can be sold in the secondary market maintained by Fannie Mae in much the same way as standard mortgages are. In addition, the process for offering reverse mortgages are not so very different than the process for offering standard mortgages, he said.
But with that said, Paukovich noted that reverse mortgages are remarkably different from standard mortgages in the sorts of emotions and expectations they can arise on the part of borrowers.
“Reverse mortgages have a significantly longer sales process,” Paukovich said, sometimes taking as much as a year from the time a borrower first attends one of Ent's informational seminars about the product to the point where the loan documents are signed.
Paukovich attributed the longer time line to a number of different factors, including having to overcome borrower skepticism about how good a reverse mortgage can be.
“We often see a little of the 'where's the catch?' type of thing from our members who doubt the product,” Paukovich explained, adding that there are procedural hurdles as part of the application process that borrowers still had to go through. For example, reverse mortgage borrowers have to be counseled about the product by an independent, HUD-approved counseling firm before they even put in an application, Paukovich explained.
Then there are the rare occasions when, Paukovich said, the adult children of members have actually stepped in to prevent the members from getting a reverse mortgage.
“It's rare but it does happen,” Paukovich said. “Adult children of the credit union members step in to prevent their getting a reverse mortgage, arguing that it's their inheritance and preventing the mortgage from going forward. It doesn't happen a lot, but it does happen.”
Paukovich also reported that demand for the loans was going through a lull right now as well, partially due to the drop in home prices, making it harder for borrowers to get as good a deal on reverse mortgages and partially because FHA cutbacks have meant borrowers were having to come up with more money when closing the mortgages, he added.
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