As many housing market experts had predicted, with the growing number of Americans reaching retirement age, reverse mortgages are gaining popularity.  The FHA approved over 118,000 Home Equity Conversion
Mortgages, the most widely used reverse mortgage product, in 2008.

The reverse mortgage gets its name from the fact that the stream of payments is reversed.   Instead of making monthly payments to the lender, as with a regular “forward” mortgage, a lender pays you.  A reverse mortgage enables older homeowners to convert part of the equity in
their homes into tax-free income without having to sell the home, give up title, or take on a new mortgage payment.

In at least one sense, they are especially big this year because the maximum size of the FHA HECM has been raised from $417,000 to $625,500 for 2009.  And with a new program available for the first time this year, a reverse mortgage can be used to purchase a primary residence (see shaded box at right for more)!   The amount of funds a person is eligible to receive depends on the age of the youngest spouse, appraised home value and current interest rates.  The older you are and the more equity you have in your home, the more money you can get.

Reverse mortgages make a lot of sense for many homeowners, especially those who have diminished incomes in retirement. However, they aren’t for
everyone. If you are thinking about initiating one, we strongly urge that
you include a financial advisor and family members in the discussions.

Who qualifies for a reverse mortgage?  First, all owners on the title must be over 62. If you have a spouse who is over 62 and is not on the title, you need to think about adding him or her.  Second, you must own your home free and clear or have a small enough mortgage balance that it can be paid off at closing with proceeds from the reverse mortgage.

What are the options for getting the money?  Depending on the particular reverse mortgage program, the options include: (1) as a fixed monthly payment either for a set term or for as long as you live in the home; (2) as a line of credit; (3) as a lump sum; or (4) a combination of the three.

How can the funds from a reverse mortgage be used?  There are no
restrictions on how you use the money, but good judgement should be
exercised.  Some typical uses are: eliminate mortgage payments; supplement retirement income to cover daily expenses; repair or modify your home for health needs; pay off bills; pay for health expenses; underwrite your grandchildren’s college expenses; pay property taxes; avoid foreclosure. 

Does a reverse mortgage affect my current government assistance, retirement benefits or estate plan?  A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, reverse mortgage proceeds that are banked could be counted as an asset and affect eligibility.  With respect to the impact on your
estate, since you still own the home, any equity that remains after death goes to your heirs. You can never owe more than the value of the home. Even if the proceeds received exceed the value of the home, your heirs would not be liable nor would other assets be attached. 

How is the loan paid back?  No payments are due on a reverse mortgage
while it is outstanding. The loan is repaid when you cease to occupy it as
a principal residence, when you or the last remaining spouse pass away, sell
the home or permanently move out.  The definition of moving out is twelve
months of non-occupancy. 

What are the negatives of a reverse mortgage?  Upfront costs for a reverse mortgage are substantial. A HECM will come with origination fees of from $2,500 to $6,000, a 2% mortgage insurance premium, plus many of the closing costs that would be associated with a home purchase. If you plan to stay in the home for less than four to seven years, there may be better options, such as a home equity loan or cash-out refi.  You will be consuming the equity in your home. If your goal was to leave the home debt-free to your children, that can no longer happen. If that was your aim, you need to sit down and conduct a frank discussion of your financial situation with your family to discuss alternatives for your needs. 

Before you can be approved for a Home Equity Conversion Mortgage, you must complete a counseling session with an FHA approved counselor.
For more unbiased information on reverse mortgages, check out the AARP
web site at http://www.aarp.org/money/personal/articles/reverse_mortgage_basics.html.  © 2007, Real Estate Information Services, Capitol Assets & Choice Finance®

Alex Echeandia, Choice Finance

The newest wrinkle in reverse mortgages is that they can now be used to purchase a principal residence under the FHA Home Equity Conversion Mortgage (HECM) for Purchase program.

How does HECM for Purchase work?
-The purchaser(s) must be 62 or older. 
-The appraised value of the home (or contract price if it is less) is subjected to a discounting calculation based on the age of the purchaser(s)
and the current interest rate.  The result is the “principal limit,” which is
the amount available under HECM for a purchase.  The older the purchaser(s), the higher the limit.
-The principal limit cannot be greater than the general HECM limit of
$625,500 for 2009.
-The difference between the principal limit and the purchase price plus the
program fees (which will run to 7% and up), must be made up by the
purchaser.  This essentially constitutes the downpayment on the home.

For example, on a home that sells and appraises for $300,000 and has a
principal limit of $195,000 and fees of $21,000, a purchaser would have to
bring $126,000 to the settlement table.  This might seem like a big cash
commitment, but consider the benefit: it enables a purchaser who has substantial assets (such as from the sale of a previous home), but
income that might, otherwise, be insufficient for a home purchase, to
buy a house and have no mortgage payment for life!

While a credit score is not required, the lender will want to determine that
there are no financial obligations, monetary judgments (including any
on a non-borrowing spouse) or liens that could jeopardize the HECM lien
and compromise clear title.  If you choose, you can provide a larger
investment amount in order to retain a portion of the available HECM proceeds for future draws.

Taxes, insurance and any repairs remain the purchaser’s responsibility to pay.  Understand, FHA is very careful about determining the source of purchaser’s assets for the required investment, so they will insist on verification of the sources of these funds. 

Bridge loans and other gap financing methods can’t be used to meet the cash investment requirement or pay closing costs nor can subordinate liens, personal loans, cash withdrawals from credit cards, or seller financing.

Borrowers can use the HECM for the Purchase program on a new primary
residence while retaining their existing home as a rental property.  Lenders will need proof of income sufficient to pay mortgage payments, taxes, insurance and maintenance. 

HECM for Purchase applicants have to undergo counseling with a FHA approved counselor.  © 2007, Real Estate Information Services, Capitol Assets & Choice Finance®

Josh Burley of Choice Finance®

The Treasury Department has announced an expansion of its Making Home Affordable Program aimed at encouraging loan modifications for struggling homeowners with second liens.  The original version of the program did not address situations where homeowners had second liens, such as where a purchaser used a piggyback second mortgage to reduce the need for a downpayment. 

Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified, Treasury found.   Treasury estimates that up to 50% of at-risk mortgages have second liens.  By offering homeowners a way to lower payments on their second, Treasury said it may potentially reduce payments further for up to 1 to 1.5 million homeowners with second mortgages. 

Under the new program for second liens, when a modification is initiated on a first lien, servicers participating in the second lien program will automatically reduce payments on the associated second lien according to a pre-set protocol.  Treasury will enter into agreements with second lien holders to reduce interest rates for five years to 1% on fully-amortizing second liens and 2% for interest-only seconds.

Treasury will also pay second lien servicers for modifying a loan and a
bonus for each year the homeowner stays current on the payments
As an alternative, servicers will have the option to extinguish the second
lien in return for a lump sum payment under a pre-set formula determined by Treasury in cases where extinguishment is most appropriate.

Under the plan, whenever first mortgage holders cut a borrower’s principal
balances by a percentage of the loan amount, second lien holders will be
required to reduce balances owed by a similar percentage.  Stressed homeowners with second liens should call the servicer of the
lien to see if help is available under the program.  © 2007, Real Estate Information Services, Capitol Assets & Choice Finance®

It might have been better to have titled this article “Condos for Cash,” since it seems that all-cash might be the only guaranteed way to purchase a condo today.  Simply put, if you are interested in buying a condominium in today’s market, be prepared to face some substantial financial hurdles. 

The problem now lies with the speculative growth that took place during the
last real estate boom.  Apartment buildings were converted at an incredible rate to take advantage of the demand and sold at exorbitant prices.  When the market sagged, it affected developers who were building new units. Since a condo owner is also a joint owner of all the common areas, any sizeable drops in ownership due to people not going through with their
contracts, being foreclosed on or sales coming to a halt hurts the cash flow
(since condo dues are not being paid) needed to pay the association’s bills.
As this economic stress began to impact condo communities, its effects
have been disastrous for their financing.  Almost all mortgage insurance companies are now refusing to insure any condo loans and Fannie Mae and Freddie Mac have tightened their rules considerably, making financing very hard to obtain. 

So how can you buy a condo?  First of all, all-cash transactions will always work and you can negotiate some incredible deals in today’s market due to the enormous supply and lack of buyers. However, this is generally a
path reserved for well-heeled investors. 
If you finance the purchase, here are your current options: 
FHA- This is the only option if you have limited funds since FHA only
requires a 3.5% downpayment.   However, the condo project has to be FHA/
VA approved and this approval list can change rapidly.  The key requirement for FHA/VA approval is the size of the investor concentration in the project.  The higher the percentage of non-owner occupants (renters), the greater chance that the project is not approved or is in danger of losing its approval.  The reason the number changes is that, in a slow market, if you can’t sell the property you may have to rent it in order to stay current on your mortgage. 

Conventional Financing Financing- You will have to make at least a 20% downpayment and pay a premium (rates will be higher due to the perceived risk) in order to get the mortgage.  Fannie Mae also has rules regarding investor concentration.  But Fannie Mae also monitors the type of development you are buying in (mixed-use projects that have a non-residential component are not eligible), seller concessions and the percentage of units already sold and settled.  A seller will have to provide an incredible amount of documentation to satisfy both Fannie Mae as well as the underwriter. 

Financing Developer/Seller Financing- Where one party is eager to sell, many options are always available.  Developers may well be able to offer below-market financing from the bank that provided the construction loans. Here, everyone has an interest in making things work. 

If you are thinking about buying a condo, extra due diligence is required, so you will need to:
• Find a Realtor who is knowledgeable about condos and who you can trust.
• Closely analyze the financials that must be provided to you before the
contract can be ratified.  Be especially careful if the development
lacks adequate reserves for future maintenance (parking lots will have to
be repaved), has a large number of delinquent condo dues payers or has
too many units on the market.  Today’s approved project may be tomorrow’s casualty.
• Don’t give up hope. Many good developments are being affected
through no fault of their own.  Bargains are there but purchasing one will
require some extra effort on your part.
• These purchases and loans will take longer to process and
complete.© 2007, Real Estate Information Services, Capitol Assets & Choice Finance®

Buying a condo?  Call me, Alex Echeandia

There’s a new sheriff in appraisal town and the name is HVCC.  Home Valuation Code of Conduct.

The HVCC,which was implemented May 1 by Fannie Mae and Freddie Mac, was meant to make appraisals less susceptible to undue influence by loan officers, real estate agents and others, and thus more accurate and reliable
Whether the HVCC will, on balance, be a benefit to homebuyers remains to be seen and so far has been a nightmare.

Ironically, the genesis of the code of conduct was not HUD or Fannie Mae and Freddie Mac, but New York State Attorney General Andrew Cuomo. Cuomo settled a lawsuit against the two mortgage giants for faulty appraisals with their agreement to adopt the code.

For one thing, it is making appraisals substantially more costly for consumers. In some cases $525 upfront instead of the $350 it used to cost. Appraisals are sometimes taking 30+ days to complete!! Previously we could turn an appraisal in few days when needed, definitely within a week.
The clear winners are appraisal management companies (AMCs), because they are the easiest way for lenders to comply with HVCC rules requiring separation between loan production workers and risk management.

The certain losers, are independent appraisers, who can no longer count on the patronage of satisfied local lenders. Most will be forced to dance to the tune of the AMCs or starve. And they are being asked to work for less, even as the AMCs are charging borrowers more!

The AMCs are charging more per appraisal and adding extra charges. Plus, appraisals previously could be paid at settlement; now they must be paid up front on a credit or debit card. And should you change lenders before closing, you may have to pay for a new appraisal at additional cost.

THANKFULLY, FHA has not adopted the HVCC, so it is not requiring lenders to use the AMCs. Nevertheless, many FHA lenders are using AMCs anyway and charging even more for the privilege than for Fannie and Freddie loans!

Undue influence can be just as easily exerted by the AMCs as by any other group. And there is no guarantee that the appraisers willing to work for the AMCs lower rates will be as knowledgeable or skilled in the local market. In fact, we used to be able to use LOCAL appraisers who know the market.. NOW, we end up having to use big national companies who order the appraisal.

It isn’t uncommon for them to have a Baltimore Appraiser appraise something down here in Montgomery County!!   What a joke. These UNlocal appraisers have come in literally 200,000 low… They don’t care. They aren’t held accountable to anyone, and they’ve already been paid upfront peanuts for doing their work. These INCORRECT values either affect the rate on a loan OR kill the loan completely. © 2007, Real Estate Information Services, Capitol Assets & Choice Finance®

It is shameful. 
HVCC/the new appraisal rules are bad for borrowers
Please share your thoughts