Rate hike, equity sharing, divorce, and family loans


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Despite challenges there is reason for measured optimism

HECM originators in the state of Connecticut have their own October surprise.  The state’s governor signed into law Senate Bill 150 which goes into effect October 1st, 2018. It requires that prospective borrowers receive HECM counseling and provide a certificate of completion to the lender before any final and complete application is accepted. Good record keeping is essential as Connecticut HECM lenders must keep the counseling certificate for ‘the term of the reverse annuity mortgage loan’. An interesting choice of words. Any violation of the new law will be considered an unfair or deceptive trade practice. Our friends in Connecticut will want to mark their calendars.

reverse mortgage newsDivorce is perhaps one of the most devastating events for one’s retirement. A recent column at PlanSponsor.com cites a study by the Center for Retirement Research at Boston College that shows the net worth of non-divorced households is about 30% higher than divorced households. Those at risk of being unprepared as measured by the Retirement Risk Index rises 6 percentage points for divorced men but is statistically insignificant for divorced women. One reason given for this difference is that single women are more likely to own a house which they can use for a reverse mortgage according to the study. Perhaps now is a good time to consult with your local family law attorneys on how the HECM can help mitigate the impacts of divorce.

More homeowners are making peace with appreciation sharing loans. A MarketWatch column last week tells the story of Mike Lindsay, an Orange County widower who found himself devastated with medical bills and childcare costs in the wake of his wife’s death. His surest bet turned out to be his house. Unable to refinance his home which was valued at $1.2 million he turned to Unison. The company offered Lindsay $200,000 in exchange for a share of the future appreciation of his home as part of its HomeOwner program. Karen Kaul with the Urban Institute who has discussed reverse mortgages reverse mortgage on several occasions said “it’s good to see people experiment with this. I hope this eventually takes off.” He did add his specific concerns about the lack of consumer protection in such arrangements. The question is, will more senior homeowners find such an arrangement an attractive alternative to a reverse mortgage?

We often hear financial pundits espousing the pitfalls of a reverse mortgage, but few explain the risks of loaning your elderly parents money to stay in their home. The Pittsburgh Post Gazette  featured two elder law attorneys who cautioned readers of the risks involved when lending money to parents- namely being an ‘unsecured creditor’ This means if their parents receive any state assistance for nursing or homeware services the kids risk not being repaid as the state’s lien takes precedence.  What’s a better approach? “Parent and son could have entered into a simple loan documentation agreement whereby parent signs a note for the loan tied to a mortgage which secures the debt to the parent’s home. Result under this improved arrangement: son gets $100,000, state gets whatever is left after that.”

In our last story, the Federal Reserve has raised their 2018 economic outlook forecasting a median real GDP of 2.8 percent for the year and consequently increasing rates. The Fed raised it short term rate a quarter of a percentage point to 2% and hinted at two more hikes which would bring the total of four interest rate increases in 2018. Watch your rate sheets closely in the coming weeks and months.

 

1 comment

James E. Veale, CPA, MBT June 18, 2018 at 3:46 pm

The Unison product was previously the Rex Agreement. UNLIKE a reverse mortgage, it is a true equity release product. Net equity as defined in the mortgage industry is simply the value of the home minus the debts against it. The only mortgage product which survives today with the possibility of an equity release provision is the HECM with its shared appreciation rights addendum. No lender in their right mind is offering that today.

When there is an equity release product on a home, the value of the property must be divided between the actual owners of the equity before calculating the net equity of the home. Where there is an equity release product on the home, the tenant homeowner will not be eligible for a reverse mortgage. Also equity release entities are reluctant to enter into any type of shared arrangement where a reverse mortgage is already in place.

While serving as a SVP for S1L and holding both a NMLS license and a California real estate broker license, I sold Equity Key along with reverse mortgages; however, my ability to originate reverse mortgages at that time was limited to proprietary reverse mortgages only. My wife as a NMLS licensee originated both types of reverse mortgages in my stead but was not involved in Equity Key. The second Equity Key product was about the same as the Rex Agreement.

I liked being able to offer both products; however, as instructed by and in compliance with HUD, as long as I was offering Equity Key, I was not able to offer HECMs.

Dual licensees (real estate and NMLS) who are direct employees of an approved FHA Mortgagee must be careful not to have any active use of their real estate license other than offering mortgages when offering FHA products. If the employee works for a TPO on the other hand, they must look to their supervising FHA approved Mortgagee(s) for direction on this matter.

Although never a huge competitor to HECMs, equity release products help seniors (and sometimes younger participants) obtain the cash they need without any periodic payments and no interest or other accruing costs. With a true equity release product, there is a legal acquisition of some portion of the legal rights bundled up in the real estate; it is not debt. With a reverse mortgage, there is debt and the lender only has rights in the property as collateral.

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