EPISODE #701 Canada’s Home Equity Bank exec says reverse mortgages can bring a whole new approach to estate planning
“I think that there’s an opportunity for reverse mortgages to put the whole landscape of estate planning on its ear”, said Andrew Cairns, National Lead of Wealth Management at HomeEquity Bank
Other Stories:
700 Episodes & 13 years later- A look back at the HECMWorld Weekly podcast
HECM Counseling in Massachusetts could stop immediately. Here’s why.
Covid-19 isn’t the only pandemic spreading across our nation. Fear and uncertainty are just as contagious. Two particular groups are especially worried- older Americans nearing retirement and those who are already entered their non-working years
A number crunch by credit reporting agency Centrix brought up a truly remarkable statistic. They found 8 percent of people in the Silent Generation aged 76 or over still had mortgages.
Each November our industry eagerly awaits the release of FHA’s Annual Report to Congress on the status of FHA’s Mutual Mortgage Insurance Fund, and more specifically, the HECM’s performance. Today we will look at seven key takeaways from that report.
First- Over half of all HECMs were originated in 10 states.
[read more]
California is truly the golden state when it comes to HECM originations ranking in first place for all federally-insured reverse mortgages since 2009. According to the Independent Actuarial Review for Fiscal Year 2021, over half of all originations came from the following states: California, Florida, Arizona, Colorado, Texas, Washington, Utah, Oregon, New York, and Nevada. Today, these states account for 71% or nearly three-quarters of all HECM origination volume.
Second, Maximum claim amounts surged with home values. A surging housing market amid the pandemic boosted HECM Maximum Claim Amounts to a staggering average MCA of $433,870, up from $389,378 in 2020. The geographical concentration of maximum claim amounts means that the future performance of the HECM and its economic value will be heavily dependent on home price appreciation or depreciation in a handful of states which include California, Florida, Texas, Pennsylvania, and New York.
Third- The real estate market is king. When it comes to the HECM’s capital ratio inside FHA’s Mutual Mortgage Insurance Fund the impact of home prices significantly outweighs other factors. In fact, the MMIF capital ratio is three times more sensitive to a mere one-percent decrease of home price appreciation than a one-percent decrease in interest rates.
Fourth- A backlog of mortgage forbearances remains. Foreclosure moratoriums have been extended repeatedly since the beginning of the pandemic. While many borrowers have come out of forbearance there is still a sizable cohort of loans that could emerge from forbearance in the next six months which could strain the capacity of FHA and negatively impact the overall MMI Fund.
Fifth- Both the forward and HECM program’s capital ratios have dramatically improved. Since 2017 the forward stand-alone capital ratio inside FHA’s MMI Fund has doubled to a positive 7.99 percent. The HECM portion dug itself out from a negative 18.30 percent in 2017 to a positive 6.08 percent The improvement of the overall FHA capital ratio to 8.03%, which is well above the Congressionally-mandated 2% threshold, has led to renewed calls to reduce FHA insurance premiums for first-time homebuyers.
Sixth- Problematic HECMs originated between 2009-2013 are dwindling. The popularity of fixed-rate full draw HECM loans in the years following the housing crash of 2008 were problematic increasing assignments and payouts from FHA’s insurance fund. The good news is that cohort of vintage loans has decreased significantly.
Seventh- Type 1 insurance claims where HECM properties were sold at a loss have steadily dropped since 2015. In addition, low interest rates are slowing Type 2 claims which are for the assignment of HECM loans that have reached 98 percent of their original maximum claim amount.
Equity erased- and no it’s not always a reverse mortgage
Often critics and media pundits disparage the reverse mortgage loan as erasing a homeowner’s accumulated equity. Do reverse mortgages consume accumulated equity? Certainly, when the homeowner is not making payments. Reverse mortgages are negative amortization loans in which unpaid interest is added to the previous month’s principal balance. However, the equity is not ‘erased’ until a triggering event takes place. This week we look at the ways an older homeowner’s equity can actually be erased with or without a reverse mortgage.
Fraud-
[read more]
The first is Fraud- The Asheville Watchdog, a local publication in Asheville North Carolina reports that several elderly Black homeowners were allegedly defrauded by a local attorney and his real estate holdings company. Several homeowners reported being approached shortly after a mortgage or tax foreclosure notice was filed alleging they unknowingly signed deeds releasing interest in the property. In one instance a family received $1,200 only to see the property resold the same day for $45,000. In another case last September a judge returned home to a family after finding the same company obtained the property by fraud.
The next way equity is erased is by foreclosure. Traditional mortgage borrowers who default on their payments stand to lose any remaining equity in the home in a foreclosure. In fact, delinquent borrowers with substantial home equity are most likely to see an expedient foreclosure as the bank stands to recoup some or all of their lost payments.
Loss of employment. The leading cause of foreclosure is the loss of employment and income. Foreclosure trends may be localized based on regional unemployment or business closures.
The loss of a spouse. The loss of a life partner is not only emotionally devastating but can often have catastrophic financial consequences. The common challenges surviving spouses may face are the loss or reduction of pension payments, a reduction of Social Security benefits, or the loss of income if they were still working.
Adjustable-rate loans. Thanks to low fixed-rate mortgages in the wake of the 2008 housing crisis few older homeowners currently have ARMs or adjustable-rate mortgages and that’s good news. Unlike adjustable-rate reverse mortgages where interest rate changes have no impact on the homeowner’s cash flow, traditional ARMs can lead to payment shock when rising interest rates increase the required monthly mortgage payment.
Credit card debt. Sadly, some homeowners prioritize credit card payments over their mortgage payments leading to an eventual foreclosure. This is most unfortunate as some may be able to negotiate payments or file bankruptcy to eliminate their liability with creditors. It’s better to protect the roof over your head instead of worrying about your credit score.
The other ways one can see their equity erased are divorce, overspending, health emergencies, and financial shocks. And speaking of shocks inflation shows no signs of slowing or being ‘transitory’. The increased cost of living for older homeowners on fixed incomes could leave some facing the specter of foreclosure. So do reverse mortgages suddenly erase equity? No. However, they do use a portion of the home’s value and subsequently consume equity over time while the borrower enjoys the benefit of loan proceeds or the elimination of their previously required mortgage payments.
Rather than claiming reverse mortgages erase equity perhaps now is the time to erase misleading statements, hyperbole, and harmful advice that often ignores one’s largest financial asset.
