About Face in the Reverse Mortgage Market?

According to news compiled by AmericanBanker.com, the Reverse Mortgage niche in the Mortgage Industry is getting ready to blast off. Plenty of banks are jumping on the bandwagon before it gets really rolling. JP Morgan Chase and Citigroup are both considering ways to get in on the action.

Says an article from American Banker's Mortgage Update email, "A growing number of financial companies are moving into reverse mortgages, or thinking about doing so."

A wave of baby boomers-the ever desirable demographic-will be turning 62 this year, the minimum age for Reverse Mortgage loans. Of course, anyone who's anyone knows that the upfront fees on Reverse Mortgages are a killer because they are insured by the FHA. Legislation being considered in Congress may change all that, prompting a whole slew of originations that were held back by those higher fees. Financial Planners are already starting to suggest Reverse Mortgages as an option for their eligible clients. Some people are choosing a cash-account Reverse Mortgage, which has much lower closing costs.

With the subprime mess, banks are looking at the newest niche mortgage product and Reverse seems like a good candidate. Why, you ask. Because this loan product has the backing of the U.S. Government so can't you imagine all those slick twenty-something phone jockeys who sold a gazillion bad sub-prime mortgages licking their lips at the possibilities of ripping off old people and then saying, "and best of all it's backed by the U.S. Government so you know it's safe"?

Seniors must be wary of these types. There are requirements in place before taking a Reverse Mortgage, like independent counseling.

"Before a customer signs anything they must take homeowner counseling," warns Jim Calimopulos, Director of NY Lending Operations at Madison Funding, Inc. "Some unscrupulous Loan Officers are strong arming customers to sign before they fully understand what's going on. Or they're showing up on the doorstep with the counselors themselves to rush things along."

Let the games begin. In a February 14th Washington Post column, New York State Governor, Eliot Spitzer, blasted the current presidential administration for not doing enough to protect customers against predatory lending practices at banks during the subprime mortgage boom. But with the popularity of Reverse Mortgages ever increasing and at an exponential rate, in the wrong hands this could be even more devastating. If careful restrictions are not imposed the nation's elderly will suffer.

While regulating the entire industry in one fell swoop could prove disastrous, careful control over the proliferation of Reverse Mortgages could be beneficial, heading off another potential disaster like the one we are in now. Imagine the law suits of the children of parents who find out that Mom and Dad have just took out a huge chunk out the value of their home. Or the little old grandmother who walks into the State Attorney's office saying that she was bullied into taking a Reverse Mortgage by a young, fast-talking mortgage broker over the phone who closed the loan in a matter of weeks.

But what exactly is a Reverse Mortgage and why does anyone even need one?

A Reverse Mortgage is a lump sum or monthly allowance loan given to an age qualifying borrower. There are no repayments made before the homeowner passes away or sells the home. In fact, there is almost no qualifying in the traditional sense. Homeowners of a minimum age of 62 are eligible for this loan as long as they have sufficient equity in their house. There is no credit rating or proof of income qualifications as in a forward (or traditional) mortgage. Payments and qualification amounts are on a tiered scale based on the age of the borrower using an actuary scale. All the rates are same, regardless of credit or financial profile.

FHA is a large underwriter of Reverse Mortgages, so the U.S. Government backs them although some banks and agencies have introduced their own versions of a Reverse Mortgage.

Contrary to popular belief the bank does not own your home any more than it does in a forward mortgage situation and in fact the bank cannot foreclose. The bank only collects on the home at such a time as when the borrower is deceased or no longer lives in the house as his primary residence. Examples of this include moving out of state or retiring to a nursing home. Better yet, the borrower never will owe more than the price of his home, no matter what-explaining why the FHA mortgage insurance is required.

The Reverse Mortgage can have many aspects to it to help residents remain in their home and enjoy the equity they have built up. One way is to take a direct monthly payment. Another is to open a line of credit account against the home similar to a Home Equity Line. Third, people may opt for a combination of both. In any case, the borrower is ensured that they can draw on funds from the equity of their home without ever having to pay them back except as stated above.

The comfort in a Reverse Mortgage is knowing that as long as you live, your home is protected from foreclosure and you will enjoy the equity benefits. Many people who have equity in their homes but are on fixed incomes use a Reverse Mortgage to supplement their income to pay taxes and other expenses and avoid having to leave the homes they love.

"In most instances we advise customer's not to take the whole amount out," advises Mr. Calimopulos. "There are other options, like getting a monthly stipend, like a pension plan offers. In any case any existing mortgages or liens that might appear on title will have to be paid off."

If and when the newly proposed legislation passes, the fee for a Reverse Mortgage will be reduced by a half a point. While the cap currently is 2% of the lesser of the home price or the FHA loan limit, some already cut fees lower to stay competitive,

"We are down to 1.5% already," said Mr. Calimopulos. "You have to stay in the game. Everyone is cutting their fees so we have to as well."