Reverse Mortgages: A source of cash and Some New Opportunities

This week the housing slump continues with the western states of California, Arizona and Nevada taking the lead in foreclosures. It seems pretty clear that the slump will continue, now that mortgage rates are rising. The cost of money, in the form of higher interest rates, always makes home prices even more out of reach for many people. Consider that the variable mortgages that have been taken out in the last few years are re-setting and that the higher monthly payments will put more supply on the market. The only conclusion is that the markets will continue to slump until this surplus inventory is absorbed and that is now expected to take until 2008.

New foreclosures Rose to a Record level

New foreclosures rose to a record level in the first quarter, with 0.58% of all mortgages entering the foreclosure process, the Mortgage Bankers Association reported this week.
Much of the blame for the increase came from the jump in foreclosure starts in California, Florida, Nevada and Arizona, where speculators likely walked away from homes, the MBA said. Other states keeping the foreclosure inventory rate elevated were Ohio, Michigan and Indiana, where local economies were hurt by job losses.
And, as the Stanford Washington Research Group, part of financial services firm Stanford Group Co., told investors following the report, these states represent about one-third of seats in the U.S. House of Representatives -- helping to keep the issue of mortgage reform legislation on Congress' to-do list this year.
Further, the firm doesn't believe delinquency and foreclosure data will improve before the enactment of reform legislation, including the revamping of the FHA mortgage program and the imposition of restrictions on mortgage underwriting.
Mortgage Rates Spike as Treasury Yields Rise

Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 6.74 percent with an average 0.4 point for the week ending June 14, 2007, up from last week when it averaged 6.53 percent. Last year at this time, the 30-year FRM averaged 6.63 percent. The 30-year FRM has not been higher since the week ending July 20, 2006, when it averaged 6.80 percent.

The 15-year FRM this week averaged 6.43 percent with an average 0.4 point, up from last week when it averaged 6.22 percent. A year ago, the 15-year FRM averaged 6.25 percent. The 15-year FRM has not been higher since the week ending July 6, 2006, when it averaged 6.44 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.37 percent this week, with an average 0.5 point, up from last week when it averaged 6.24 percent. A year ago, the 5-year ARM averaged 6.23 percent. The 5-year ARM has not been higher since the week ending July 6, 2006, when it averaged 6.39 percent.

One-year Treasury-indexed ARMs averaged 5.75 percent this week with an average 0.7 point, up from last week when it averaged 5.65 percent. At this time last year, the 1-year ARM averaged 5.66 percent. The 1-year ARM has not been higher since the week ending July 27, 2006, when it averaged 5.78 percent.

Freddie Mac

An Extra Cash Lift Reverse Mortgages Expand to Second Homes
By Tom Kelly

Reverse mortgages for second homes, until now available through a handful of small regional banks, will soon be offered by at least two national lenders.

Bank of America, which recently announced an agreement to acquire the reverse-mortgage business of Seattle Mortgage, is expected to roll out the second-home wrinkle as soon as the purchase is completed this summer. BNY Mortgage, which recently introduced the first jumbo fixed-rate reverse mortgage, also will allow reverse mortgages on second homes under certain guidelines.

"The demographics of our seniors and the upcoming boomer group indicate there are multiple tentacles of financial planning tools that could be used in the long run," said John Nixon, executive vice president and chief operating officer of Reverse Mortgage of America, a division of Seattle Mortgage. "One of those tools would be helping people with significant equity in the second home to help tap that equity to make their lives more comfortable."

Washington Post

Reverse Mortgages

Many older Americans are seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses.They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.

In a conventional mortgage, you make monthly payments to the lender. But in a “reverse” mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations. NOTE: Reverse mortgages are loans against your house and you do not have to have any income to qualify. You must be at least 62, living in your home as your principal residence and have equity in the home.

To qualify for most reverse mortgages, you must be at least 62 and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions.

As you consider a reverse mortgage, be aware that:
  • Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender generally sets these fees and costs.
  • The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
  • Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions.
  • Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A “nonrecourse” clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid.
  • Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don’t pay property taxes or maintain homeowner’s insurance, you risk the loan becoming due and payable.
  • Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
Getting a Good Deal

If you are considering a reverse mortgage, shop around to compare your options and the offered terms. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. It will help you ask more informed questions, which could lead to a better deal.

If you want to make a home repair or improvement or need help paying your property taxes, you may want to find out if you qualify for any low-cost single-purpose loans that may be available in your area. Area Agencies on Aging (AAAs) generally know about these programs. To find the nearest agency, visit www.eldercare.gov Ask the AAA for information about available “loan programs for home repairs or improvements,” or “property tax deferral” or “property tax postponement” programs.

If you are interested in a federally-insured HECM, know that all HECM lenders must follow HUD rules, and that many of the loan costs including the interest rate will be the same no matter which lender you select. Still, some costs including the origination fee, other closing costs, and servicing fees may vary among lenders.

If you live in a higher-valued home, you may be able to borrow more from a proprietary reverse mortgage. But it generally will cost more. The best way to see key differences between a HECM and a proprietary loan is with a detailed side-by-side comparison of future costs and benefits. Many HECM counselors and lenders can provide you with this important information.

No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.

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