By Teresa McUsic
Reverse Mortgage Market in Texas
- 53,188 loans made since 2000
- $5 billion in home equity accessed
- 41,300 active (non-closed) cases
- No. 2 in total loan volume in country behind California
- 8.6 percent national market share
Source: Sente Mortgage
Reverse mortgages—the financial tool that enables senior citizens to access the equity in their homes—are in a state of flux right now as lenders seek to expand the product in Texas at the same time federal regulators are cracking down on access to them.
On the one hand, Texans in November passed a constitutional amendment, Proposition 5, to expand the ability for those 62 and older to take out a reverse mortgage by allowing them to sell their existing house and buy a new property with the unusual loan.
Texas is the last state in the union to allow this option, which will be available in January 2014. Previously, reverse mortgages could only be used in the state for an existing resident to take out part of the equity in their house through a lump sum, monthly payments, line of credit or combination of the options.
At the same time, in September the Federal Housing Authority (FHA) started a two-prong effort to restrict the loans in an effort to lessen their high foreclosure rate. Currently, one in ten reverse mortgages are in default and last month the FHA said it needed $1.7 billion from the Treasury to cover losses in its reverse mortgage program.
On Sept. 30, the FHA created new guidelines that reduced the amount of money that could be taken out of a home in a reverse mortgage by about 15 percent and restricted the amount that could be taken out in the first year, said Judith O. Smith, vice president at Cendera Funding in Fort Worth
In mid-January of 2014, the agency will further restrict the loans by requiring a financial analysis of reverse mortgage applicants to make sure they have enough income to cover their personal expenses, along with property taxes home insurance and home upkeep required with a reverse mortgage, she said.
Smith said that under the new guidelines, an expected 25-30 percent of seniors will no longer qualify for a reverse mortgage.
Both the change to the Texas constitution and the new FHA rules should strengthen reverse mortgages as a viable financial tool in retirement planning, however, Smith said.
“Finally, reverse mortgages are becoming a true financial planning tool,” she said. “Attorneys, CPAs, financial planners are finally taking time to figure it out and talking it about it with their clients.”
She gave the example of a recent client in her 80s who “flat out has run out of cash,” but wanted to stay in her house. The client had paid off her mortgage and was keeping her insurance and taxes current, while earning less than $1,000 in Social Security each month, Smith said. The woman took out a reverse mortgage, used $4,000 for repairs to the house, took out $500 in monthly payments and left the rest in a line of credit.
“She would still qualify in January under the new financial means test,” Smith said.
The new reverse mortgage product will allow Texas seniors to sell their house and use a reverse mortgage to purchase another residence in the same transaction, which will reduce closing costs to a single transaction, reducing the overall cost by $2,500 to $3,500, Scott Norman, vice president of the reverse mortgage division for Sente Mortgage and a key lobbyist of the legislation.
Allowing the addition of this kind of reverse mortgage will boost the Texas market for reverse mortgage by 15-20 percent for the next five years for the 85 reverse mortgage lenders in the state, Norman estimated.
“Nationally, the reverse mortgage for purchase product makes up to 20 percent of the market,” he said.
In addition to expanding the product, the constitutional amendment adds further disclosure requirements before homeowners take out a reverse mortgage.
“There’s a 12 day cooling off period in addition to the three days we already had, so now homeowners have 15 days if they change their minds,” Norman said. “There’s also a diagram that spells out specifically your obligations to pay taxes, insurance the upkeep on the home even when you have a reverse mortgage. It’s still a loan.”
Cara Smith, a HUD-approved reverse mortgage counselor with Housing Opportunities of Fort Worth, said she recently worked with a couple who moved to Alabama from Texas.
“Part of the reason for the move was to do a reverse mortgage for purchase, which was available there,” she said. “There’s a lot of people that want to downsize from a larger home that’s already paid for and move to a smaller home where they can age in place. This is going to give them more choices on how to do that.”
Smith said she welcomed the additional disclosure spelled out in the amendment.
“A reverse mortgage is a little bit complicated,” she said. “If you’re patient and follow the guidelines, 98 percent of your clients will understand. I very rarely refuse to issue a certificate. We make them do a budget and ask questions. If they don’t answer correctly, they are not comprehending the product.”
The No. 1 reason for a foreclosure on a reverse mortgage is non-payment of property taxes and home insurance, Smith said.
“A lot of seniors had already deferred their taxes or didn’t have insurance in place, but you must have both with a reverse mortgage,” she said. “Studies have shown most people with major financial difficulties prior to a reverse mortgage don’t change their habits and then can be foreclosed on.”
Until the new financial guidelines go into effect Jan. 14, those seeking a reverse mortgage have minimal income or credit qualifications.
After that, lenders will be required to underwrite the loans to make sure the seniors have the income for the required upkeep of the property, Norman said.
“It’s based on the Veterans Administration model,” he said. “Your residual income will have to meet your monthly obligations for utilities, food, etc. If it’s in the negative, you need to sell your property instead of take out a reverse mortgage.”
A recent analysis in the New York Times said lenders will have to analyze all income sources, including any pension, Social Security and individual retirement accounts of a borrower, then subtracting all typical living expenses, including taxes, car payments, food, insurance and utilities. If a homeowner has up to $589 left over each month he or she will probably be able to qualify for a reverse mortgage. If a borrower falls short, the lender is supposed to look at other factors.
For more information on reverse mortgages, go to the U.S. Department of Housing and Urban Development website at www.HUD.gov and search for reverse mortgage.
Teresa McUsic’s column appears Saturdays in the Fort Worth Star-Telegram. TMcUsic@SavvyConsumer.net