If you’ve heard it once, you’ve heard it a thousand times: reverse mortgages — whether you’re discussing the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) or the growing raft of available proprietary options — are complex financial instruments. It’s this complexity which can make it difficult to properly convey to borrowers not only what certain regulations and guidelines are, but also about what their own responsibilities will be to keep their loan in good standing.
This was the focus of a sales-oriented presentation during the National Reverse Mortgage Lenders Association (NRMLA) Virtual Summer Meeting earlier in the summer, where three reverse mortgage industry educators from two major lenders presented about how to properly inform borrowers about specific details that it would behoove them to know as they engage more deeply with a reverse mortgage.
The first portion of the presentation — about borrower responsibilities — aimed to ensure that reverse mortgage professionals relay both specificity and clarity when it comes to keeping a loan in good standing.
Borrower responsibilities: occupancy and keeping the home in good repair
Most reverse mortgage professionals do not need to be reminded about the occupancy requirement that comes with a HECM loan: in order to keep the loan in good standing, the borrower must occupy the home as his or her primary residence for the majority of the calendar year.
However, some borrowers may take that to mean that their movements will be restricted to their home without the ability to take a longform vacation, which in some cases can be months long. Not so according to Barbara Cripple, a sales trainer with Finance of America Reverse (FAR) out of New Franklin, Ohio.
“Now, if the borrower has a once-in-a-lifetime chance to take a nine-month long cruise around the world, that doesn’t mean that they can’t go,” she says. “But, they would want to reach out to their loan servicer to advise them of their absence from the home.”
Communicating any possible disruption in the duration of the occupancy or how the annual occupancy check could be impacted by a borrower’s movement to the servicer is a very important detail that reverse mortgage professionals should aim to make sure is clearly communicated with the borrower, particularly if the senior lives an active lifestyle that comes through to the originator in conversations. A proactive approach to communicating these requirements can make much difference when speaking to a borrower in the early stages.
Keeping the property in good repair is also a key component to a reverse mortgage at the origination and closing stages, but natural questions from borrowers may emerge in terms of the ongoing responsibilities they will have over these issues.
“When the loan is originated, there’s an appraisal done and any repairs that are needed to bring the home to minimum property standards are addressed either at or before closing. What about ongoing maintenance? The lender doesn’t have the capacity to drive by each home in their portfolio once a year just to make sure it’s being maintained.”
This is where the borrower should be advised that local authorities can enter the mix, which could include entities like the local health department. If such an authority has to issue an infraction to a property for a particular issue, then the holder of the mortgage is notified of the infraction and in a reverse mortgage situation, the lender will notify the borrower.
“Because the lender has a mortgage on the property, if the health department were to issue a citation, they would notify the mortgage holder,” Cripple explains. “That’s how the lender knows that there’s a problem. Now, nine times out of 10, these are small infractions like the grass is too high and it’s taller than what’s allowed by the local code. The borrower gets the grass cut and everything’s fine. However, if there’s a hole in the roof, and every time it rains outside it also rains inside the home, that is a problem.”
Property charges, fixed vs. adjustable flexibility
The associated property charges that the borrower has to keep up with — including property taxes, homeowners insurance and in some cases homeowners association (HOA) fees — account for a major component of what a borrower must remain current on to keep the loan in good standing. Sometimes these more “typical” ongoing charges may not be the only ones a borrower must be concerned about, however, Cripple explains.
“Now, a lot of times when we talk about property charges, we automatically think of property taxes and hazard insurance,” she says. “But it doesn’t stop there. They can have a homeowner’s association with HOA dues, condo dues, ground rents or land leases to pay. They would need to keep all of those current as a requirement of the loan. And don’t forget other kinds of insurance that could be required, like flood insurance if they’re located in an area that would require it.”
The reverse mortgage product has a wealth of options available to borrowers that offer different rate and disbursement options, which need to be adequately explained so a borrower has a good understanding of all the options they may be able to take advantage of.
The fixed-rate option being closed-end with a one-time disbursement may fit certain borrowers in some situations, but is reasonably restrictive when compared to other, adjustable-rate options, she explains.
“This loan program has a lot more flexibility for your borrowers,” Cripple says of the adjustable-rate variations. “With forward mortgages, the borrower may be hesitant to take an adjustable-rate because if the rate would go up, their monthly payment would, of course, be higher. However, if the interest rate goes up on an adjustable-rate HECM, you still don’t have a payment to make back on the HECM loan.”
Instead, this affects the amount of interest that accrues on the loan, and what will be due back when the loan accelerates with a maturity event, she says.
“So, if the interest rate goes up on a HECM loan, [the borrower’s] payback at the end of the loan may be higher, but it isn’t going to affect their monthly budget.”