Aside from its central purpose of enabling people 62 or older to pull equity from their homes for various retirement uses, a reverse mortgage also may be a financial lifeline for seniors struggling to make their forward mortgage payments – those ineligible for help under the federal government’s HAMP, Home Affordable Modification Program.
That program, for borrowers with government-insured loans – such as those owned by Fannie Mae and Freddie Mac – calls for modifications of loan terms for those mortgagors whose PITI (principal, interest, tax and insurance) payments exceed 31 percent of their household debt-to-income (DTI), also known as “front-end ratio.”
So far, fewer than 200,000 borrowers have been granted permanent loan modifications under HAMP and the program is now expected to help far fewer than the up to 4 million struggling borrowers initially envisioned. In response, a new HAMP proposal put forth last week would provide refinancing to several million households through government-backed mortgages with lower payments.
But, as Meg Burns, director, FHA Office of Single Family Program Development, explains to RMD, “There are a lot of consumers whose front-end ratio” might not reach 31 percent, “and it is still difficult for them to make their mortgage payments. They don’t qualify for HAMP.” She estimates that some 30 percent of consumers seen by HUD’s approved counseling organizations are in that situation.
A reverse mortgage is certainly advisable for seniors in need of financial support generally, according to Burns, who notes that “it has been suggested by AARP as a solution for seniors in trouble. We often get calls from people in the lending community about it. If somebody is in trouble or even in the foreclosure process; they could use it.”
Also, “if there is a senior who has a forward mortgage that they are unable to pay there is a potential that a reverse mortgage could be used to pay off the existing lien. That’s the beauty: there is no mortgage payment,” says Burns.
Written by Neil Morse