A reverse mortgage was a “godsend” for Irene Merritt’s elderly relatives. House-rich but cash-poor due to a fixed income that no longer covered living expenses, Merritt’s relatives had cut back on food and utilities and planned to take less medicine to make ends meet. Desperate, they sought Merritt’s advice.
Merritt used her 30-plus years of experience in financial services to search for options. Only one solution allowed them to remain in their home and still live comfortably: a reverse mortgage.
Soon after, Merritt joined $5 billion asset America First Credit Union, Ogden, Utah, and asked the credit union to consider offering reverse mortgages. Today Merritt is one of America First’s reverse mortgage specialists, helping the credit union make 37 reverse mortgages valued at $5 million in the first seven months of 2011. From 2000 to 2010, America First made reverse mortgages to 493 members for approximately $67 million.
This scenario is likely to become increasingly common as more baby boomers enter retirement without enough funds to see them through. At some point, the only option for many of these boomers will be to tap home equity to meet living expenses.
Many credit unions—and their older members—have been reluctant to consider reverse mortgages due to negative perceptions created by unscrupulous lenders before the Housing and Economic Recovery Act of 2008 took effect.
The act provided tighter regulations, increased lending limits, and it capped the mortgage insurance fee at $6,000 for standard home equity conversion mortgages (HECM) offered through the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA).
The prospect of reputational risk combined with the recession and declining home values derailed many credit unions’ plans to seriously consider reverse mortgages, notes Dan Green, executive vice president of credit union solutions, Prime Alliance Solutions Inc. But credit unions are taking a second look at the product as a service to their senior members who are house-rich and cash-poor.
Prime Alliance works in partnership with MetLife to provide reverse mortgage origination and servicing for credit unions. Most reverse mortgages made by credit unions are FHA-insured HECM loans, minimizing the risk to the credit union.
“This is a loan completely backed by the value of the collateral,” Green adds. “It has nothing to do with the borrower’s income and everything to do with the equity in the home.”
Because most credit unions work with vendors to offer reverse mortgages, they can choose how much—or how little—of the origination, processing, underwriting, and servicing is done in-house. Credit unions also can de-velop reverse mortgage products as part of their portfolios.
Reverse mortgages are based on home equity, which can be difficult to predict in a soft housing market. The amount available to reverse mortgage borrowers generally increases with the value of the home, the age of the youngest borrower, and a lower interest rate. “You have to be careful if your credit union is in a market where housing prices are declining,” Green notes.
At America First, Merritt says declining home values pose the greatest barrier for seniors on fixed incomes who want to use their homes’ equity to improve their monthly cash flow. Borrowers typically want to pay off an existing mortgage, catch up with repairs, or create a new stream of monthly income, depending on how the loan is structured.
Members’ plans for these loans vary: One member used a lump sum payment from a reverse mortgage to buy a vacation home, while another chose a monthly payment so she could stop stretching her food budget with cat food.
Merritt says America First focuses on what’s best for members when it reviews applications and structures the loans. In some cases, that might mean referring them to other sources of help. For others, it might mean encour-aging members to use a HECM Saver mortgage, where mortgage insurance fees can be less than $100 in exchange for loans based on a smaller percentage of home value, generally 40% to 50% rather than the 60% to 70% available for standard HECMs.
America First promotes reverse mortgages with educational seminars and branch visits to educate staff about how and when to offer the reverse mortgage option. About half of applicants are new members who learned about the program from a satisfied borrower.
The credit union doesn’t charge up-front fees for appraisals or credit reports so there’s no cost for borrowers who decide against a reverse mortgage. America First handles the application and processing, and then sends it to MetLife for underwriting and approval.
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