Reverse Mortgage Loan Blog

Older homeowners who have spent years building up equity may be tempted to cash out through a reverse mortgage. But high fees can make these loans pricey.

A new government program reduces some of the expenses. In October, the Federal Housing Administration, the unit of the Department of Housing and Urban Development that runs the reverse mortgage program known as Home Equity Conversion Mortgage, or HECM, introduced the Home Equity Conversion Mortgage Saver, or HECM Saver.

HECM (pronounced HECK-um) Saver trims the upfront insurance premium due at closing to 0.01 percent of a property’s value, from 2 percent. But the amount that can be borrowed is also reduced, by 10 to 18 percent, compared with the standard HECM loan program.

Still, Stanley Gil, a reverse mortgage consultant in Garden City, N.Y., said, “I think we’re going to see a lot of people using it.” The loan “is really going to help people who need some extra cash and have built up equity in their home,” he added.

And AARP says the Saver loan would work well for those homeowners who did not need to borrow the maximum allowed — which is $625,500, based on a property’s value and the interest rate of the reverse mortgage, among other things. HUD provides calculatorsto help determine how much can be borrowed, and AARP offers advice on its Web site.

Reverse mortgages essentially release the equity in a property as cash that can be used for expenses like health care or home renovations, while at the same time paying off whatever remains on the mortgage.

The loans leave homeowners with no monthly mortgage payments; they become due, with interest and other fees, when the owners die, move, or sell the property — or if they fail to maintain the property or keep up with property taxes and insurance.

The leveraged property must remain a primary residence, though, and only single-family homes qualify — as well as buildings with one to four units, provided at least one of the units is occupied by the borrower. Among the other restrictions is age. Anyone who is an owner, and is listed on the title to the property, must be at least 62.

Reverse mortgages boomed in recent years but then acquired a bad reputation, in part because of their costs. Origination fees for the loans are now capped at $6,000, while other closing costs are about equal to those for a conventional mortgage. Until HECM Saver, the upfront insurance premium was a major additional cost that could run as high as $12,510.

Fixed-rate reverse mortgages typically run 0.25 to 1.25 points above conventional mortgages; they now generally range from 4.99 percent to 5.25 percent, depending on the loan size, compared with an average 4.91 percent for a 30-year fixed-rate conventional mortgage.

The tax-free payout in a reverse mortgage, which can also carry an adjustable rate, can be taken in a lump sum or parceled out monthly, providing a steady income stream. The loans don’t require a minimum credit score or have income limits. But borrowers cannot be underwater, or owe more on a current mortgage than the property is worth.

The F.H.A.-backed version of the reverse mortgage — the most popular — is still unavailable to co-op owners. Lemar C. Wooley, an agency spokesman, said the F.H.A. was “currently evaluating the HECM program for co-ops to determine if it would meet our financial requirements.”

Consumers Union, the independent nonprofit testing organization that publishes Consumer Reports, says cash-needy homeowners should consider a home-equity loanbefore a reverse mortgage, because of the high closing costs and insurance fees.

Reverse mortgages may not be suitable for homeowners who want to leave their property to heirs, mortgage experts say; often the loan must be paid off through the sale of a home, although the note may be refinanced.

SOME affluent homeowners have been walking away from a second home or investmentproperty that is worth less than what is owed on the mortgage, even though they can still afford to make the payments.

But dumping that beach condo or country cottage, or even a home bought for an adult child — a practice known in the industry as a “strategic default” — is not the same as discarding a poorly performing stock or bond. Among the lingering effects is wrecked credit that can prevent the homeowner from getting another loan of any kind for 7 to 10 years.

In July, a study by researchers from the European University Institute, Northwestern University and the University of Chicago concluded that the strategic default trend was “large and rising” among homeowners with an equity shortfall of $100,000. As of last March, it said, strategic defaults accounted for 35.6 percent of all foreclosures, compared with 23.6 percent a year earlier.

“I’m increasingly seeing people who are middle class or higher on the pay scale coming to the conclusion that ‘I may be able to carry it, but should I?,’ ” said David Shaev, a bankruptcy lawyer in New York who assists homeowners in distress.

“But the question is, can the bank come after you, and if so, what is your position? What is your liability?”

The answer depends largely on where the property is.

In “recourse” states, a lender can come after you, and usually other assets like a primary residence, for the full mortgage amount. In “nonrecourse” states, a lender agrees to accept whatever the property fetches at a short sale, foreclosure sale, or a deed-in-lieu, in which the property is taken back but not formally foreclosed on, and generally can’t sue for the full loan amount. Connecticut and Arizona are among the nonrecourse states, while Florida, Colorado, Maine, New Jersey and Hawaii are recourse states.

There is a third category of state, called “single-action” or “one-action,” which allows the lender either to foreclose on the owner or file a civil lawsuit for the full loan amount. New York, California and Idaho are in that category.

Even in a nonrecourse state, however, those homeowners who opt for a strategic default on a previously refinanced property may not be protected from lenders, because the mortgage in such a case was not accorded for a first purchase, said Philip Faranda, a mortgage broker for J. Philip Real Estate, in Briarcliff Manor, N.Y.

When home-equity loans are involved, he added, it gets more complicated. In nonrecourse states like Florida and Connecticut, the lender cannot sue to collect anyhome-equity loan taken out on the property. But in nonrecourse states like Arizona and California, the lender can still sue for repayment of a second mortgage or line of credit.

Filing Chapter 13 bankruptcy protection, in which the homeowner arranges to pay off debts at lowered amounts over a maximum of five years, is typically the only way to avoid being on the hook for the second loan, mortgage experts say. Affluent homeowners who strategically default on a second home often don’t qualify for Chapter 7 bankruptcy, which leads to liquidation but limits eligibility to those earning no more than state median income levels.

Though not illegal, strategic defaults are controversial, because they are viewed in some circles as unethical. The practice is common among property developers.

For homeowners under water, experts say, it can make economic sense. “It’s a business cash-flow decision,” Mr. Faranda said, “but the risk is that you’re rolling dice with your future credit.”

A foreclosure from default stays on a homeowner’s credit report for 7 years, while filing for bankruptcy stays on the report for 7 to 10 years, he said. A default can lower a credit score by 85 to 160 points, according to FICO, the company that created the scoring method.

This article has been revised to reflect the following correction:

Correction: December 19, 2010

The Mortgages column on Dec. 5, about defaulting on second homes, described incorrectly the ability of lenders to sue homeowners in Florida for the amount owed on a foreclosed property. Florida is a “recourse” state, and lenders may sue homeowners there. It is not a “nonrecourse” state, where lenders typically are required to accept whatever a property sells for in a foreclosure sale.

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