2014 Reverse Mortgage Update and Considerations
Late 2013 and early 2014 Updates
Late in 2013, a couple lenders created a new variation of the HECM (FHA version) Reverse Mortgage.
Until then, you had a choice of a fixed rate that required you to take all that was you were allowed (60% of the amount available or the mandatory obligations - think mortgage and some other things plus 10%). Or you could choose the adjustable rate that offered choices of cash up front, monthly payments, a line of credit or a combination of any two or three.
As of this writing (March 21, 2014) there are now three lenders with more than three new variations with names that include choice, flexible, advantage and more. In general, they require the borrower to take the maximum allowed at closing in the form of a fixed rate and the balance later. In some cases, the maximum allowed must be taken at the end of the first year when allowed by FHA or over some specified or unspecified future time period. When those funds are taken, they are also taken at the same fixed rate used for the initial funds. In more than one version, after the first year you may use the three choices previously only available in the adjustable - cash, payments and/or line of credit yet at a fixed rate.
In some cases, less than the maximum available (60%) is allowed to be taken up front but is at a significantly higher rate which translates into less money available overall (since the interest rate is one of the factors determining the amount available).
These are great advancements. However the borrower needs to exercise caution since taking 60% up front at a fixed rate may not be a good choice. See the discussion of this at Interest Rate Choices.
To be able to get one of these choices, you would need to do the reverse mortgage with one of these lenders' retail division. I don't want to use names here because it will get outdated too soon - just google 'reverse mortgage' and the words I mentioned above 'choice', 'flexible', or 'advantage' and they should pop up. Or go through a mortgage broker (such as myself) and they are likely to have access to at least one of these and perhaps all. A large percentage of lenders you will find online are retail lenders. It is more than likely they will not have one of these choices available. So if a fixed rate at 60% of the amount available makes sense, shop around to find one that has one of these choices so you can see if it is better for you than the 'vanilla' fixed rate version.
Update to this discussion as of April, 2014.
On April 1, Ginnie Mae told lenders that due to risk factors it will not purchase the type of loan described above allowing borrowers to draw from a line of credit at a fixed rate. Obviously, the risk is that, say, 10 years from now, a borrower might draw from their line of credit at today's rates (about 5%) when rates then are perhaps 7% or more.
Like most mortgage lenders, reverse mortgage lenders rely on selling the loans they do to investors (Fannie Mae, Freddie Mac, Ginnie Mae and others) so they get their money back and can re-lend it.
Two of the three lenders announced shortly thereafter that they were discontinuing their special offerings. At this time, in early May, there is still one lender willing to do these types of loans. (As a mortgage broker, I still can use them for my clients when appropriate.) Since they can't sell to Ginnie Mae and there are no other investors accepting these loans, they will be portfolio them. That means they will keep those loans on their books and make or lose money depending on economic conditions. There is a possibility they may be able to sell them sometime in the future if an investor steps forward to accept these types of loans.
As of June, 2014, there are no lenders with this choice.
April, 2014 Update
HUD issued what is called a Mortgagee Letter to make a change to one of their guidelines which will allow a spouse under age 62 to be on the loan. With an estimated beginning in August, if one spouse is age 62+, their spouse under age 62 may now be on the loan.
The amount of money available will be determined by the age of the under 62 spouse. This is not really different from current reverse mortgages where the amount available is determined by the age of the youngest spouse.
This change is a big deal. Until then, a spouse under age 62 cannot be on the loan. When the older spouse dies, the loan becomes due and payable. If the remaining spouse cannot pay off the loan, they must move on. If there is equity, they can sell and keep the equity but it still involves them moving, perhaps against their will.
It is still not a perfect situation. When the borrower on title dies, the non-borrowing spouse can stay in the house but no longer has access to any monthly payments or the line of credit.
This was partially a result of a class action suit HUD lost. While the couple may have benefited by using a reverse mortgage to avoid foreclosure or other financial issues they weren't always properly notified of the consequences from leaving a spouse off title to complete the loan.
June, 2014 Update
HUD just released a change in Principle Limit Factors (PLF). Roughly, PLF is the loan to value (LTV). It is how much money you can get based on home value, age and current interest rates.
At today's rates near 5%, the factors range from a little over 50% at age 62 to about 65% at age 90. That will change to as high as 75%at the upper age.
For interest rates near 6%, the factors range from a little over 40% at age 62 to about 60% at age 90. The new factors will go up to 65%.
This change also means (with all other factors being equal) there is less money going forward with rising interest rates than would have been the case if they made no change.
The change also included what the PLF would be for those as young as age 18 if they are the spouse of someone age 62 or older. At 5%, it would be a little over 30%. At 6%, it would be shy of 25%. The PLF goes up in steps until it reaches age 62.
The new factors go into effect August 4, 2014 - the same day those under age 62 may be on a reverse mortgage with their spouse over 62.
One take away from this is that if you are considering a reverse mortgage you are better off doing it now before rates go up.
December 15, 2014 Update - Seasoning Requirements
Effective this date, any non-HECM lien that is to be paid off using HECM proceeds had either been in place for more than 12 months or that it resulted in less than $500 cash out. This includes a cash-out refi or an Equity Line whether the funds were taken out up front or from subsequent draws. See Mortgagee Letter 2014-21 for details