Reverse Mortgage Borrowing Population Sees Rising Debt

A trend for the upcoming generation of borrowers eligible for reverse mortgages shows higher debt levels than 62-year-olds from ten years ago, a National Mortgage News article reports. Alex Farber, an experienced originator who has a reverse mortgage business with fellow originator Mario Martirano, tells National Mortgage News that this might affect the future volume of reverse mortgage endorsements among Baby Boomers.

Farber notes that many borrowers who are becoming eligible for reverse mortgages belong to the “sandwich generation,” meaning they may still be paying to put a child through college while simultaneously needing to care for elderly parents. Lenders need to adapt to this trend of higher debt levels, and Farber says that while consumers must be held accountable, the burden is on the lenders to make sure things are done right.

Farber and Martirano, the current senior vice presidents of Residential Home Funding’s reverse mortgage division, are about to become lenders, and Farber says they’re in the process of getting their direct endorsement approval to underwrite. The two originators told National Mortgage News about the necessity of ensuring borrowers are aware of the implications of a reverse mortgage.

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“Besides the counseling, we also have a secondary check, an internal compliance system where actually Mario or myself will call clients on loans and ask, ‘Just what are you trying to accomplish and is this something that may work for you, understanding at the end of the road you’re going to be eating away a little bit of the equity? Are you comfortable with that and not being able to give it to your children?'” Farber said.

If the benefits outweigh the costs, he continued, getting a reverse mortgage is the right decision, especially as the money is tax-free and can be used for whatever the borrower needs. Farber cautions against fixed rate mortgages in favor of a variable rate product that “kind of hedges your long term position a little bit better,” and also highlights the closing costs associated with reverse mortgages that seniors might not have encountered when getting a traditional mortgage.

Farber noted the HECM Saver program’s potential, but says the trend toward higher debt levels may affect a borrower’s ability to get a reverse mortgage depending on the ratio of what they owe to what their home is worth.

“The market penetration’s still very minimal and it may not become as much as people think it could be because the baby boomers are coming in with more debt,” he told National Mortgage News. “The product has to morph in some way to account for that.”

Read the National Mortgage News article.

Written by Alyssa Gerace

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  • There are several troubling aspects of this article. 
     
    What in the world does this mean:  “…understanding at the end of the road you’re going to be eating away a little bit of the equity?”  This statement is terribly misleading.  This is part of the problem about talking in terms of equity.  No one knows what will happen to equity since it has two components.  A negatively amortizing mortgage that is outstanding for 12 years with a 4.99% interest rate and 1.25% FHA MIP rate will at least double the initial amount due at funding if none of the debt is repaid before the end of that 12 year period.
     
    Then there is the issue of tax-free.  In this age, forgiveness of debt is far too common to declare that a nonrecourse mortgage has tax-free proceeds.  Internal Revenue Code 61(a)(12) makes it clear that any debt which is forgiven is not necessarily tax-free.
     
    As one reader has written in a different thread of comments, there is little doubt that the claims made by these individuals were made with “the best intentions.”  Unfortunately that is not the standard which is applied to misleading information.

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