According to a 2005 Report from the National Council of the Aging, senior citizens have over $2 trillion of housing wealth. Over four-fifths of seniors own their home and 74 percent have no house debt. Since much of this housing “wealth” is illiquid, however, it is not readily available for senior citizens who require cash to meet short term needs. If a reverse mortgage solution is structured properly, helping senior citizen meet their cash flow needs can represent a significant opportunity for credit unions.
Reverse mortgages are quietly making their presence known in the mortgage industry, and many credit unions have yet to capitalize on the opportunity. The Federal Housing Authority (FHA) has endorsed 39,674 reverse mortgage loans through the first seven months of the 2006 federal fiscal year ending September 30 in the Home Equity Conversion Mortgage (HECM) program. These loans account for 90 percent of the reverse mortgage volume. If the current pace is maintained, 2006 will be another record year for reverse mortgages, as they will have grown 774 percent in just a five year period (see graph).
A reverse mortgage allows equity-rich, cash poor seniors, typically over 62 years old, to draw cash against the value of their house. Cash can be paid out as a lump sum payment, a line of credit, or in fixed monthly payments, or a combination of the above options.
The primary difference between a reverse mortgage and a home equity line of credit is that borrowers do not have to make payments on a reverse mortgage. As a result, the criteria for approval does not include personal income or creditworthiness. Rather, the decision is based on equity and the house conditions. The loan matures when the house is sold, the last surviving borrower dies, or the house is no longer the primary residence.
If seniors own their primary residence, a reverse mortgage is a viable option. Seniors who have not yet paid off their house would have to first take a portion of their reverse mortgage to pay off the balance before they have access to the remainder of the funds.
There are three primary variables that impact the amount of cash borrowers can access:
- Value and location of the house
- Age of the borrower
- Current interest rates
If the borrower outlives his/her life expectancy, he/she will continue to receive monthly payments for as long as the house remains the primary residence. Some financial institutions have their own risk mitigation policies that go beyond the FHA requirements. Suncoast Schools Federal Credit Union ($5.1 billion in Tampa, FL), for example, was the first credit union in the country to make a line of credit for reverse mortgages. Suncoast’s program maintains a minimum age requirement of 70 and advances up to 75 percent of the property value (to a maximum of $275,000). However, executives are considering reducing these criteria in the next few months to encourage more activity.
Borrowers are required to meet with HUD-approved counselors before receiving a reverse mortgage. The counselors discuss alternatives, purposes for the cash, program costs and interest rates, and potential family concerns to ensure that the borrower is aware of the consequences of a reverse mortgage. However, borrowers will never owe more than the value of the house when they either sell the house or repay the loan. The safeguard prevents seniors and their families from owing money when the loan is repaid.
Only a handful of credit unions currently offer a reverse mortgage program. Credit unions can position the program as a member service for seniors and can increase their loan originations at the same time.
To hear from leading credit union executives who have implemented a reverse mortgage program, Callahan & Associates is hosting Addressing the Feasibility of Reverse Mortgages, its third quarter mortgage lending series webinar sponsored by Charlie Mac on July 13.