Reverse Loan Plan Coming to California
Reverse mortgages, those hard-to-find loans designed especially for house-rich but cash-poor older homeowners, will become a little easier to get beginning next month.
American Homestead Mortgage Corp., a respected lender that has been making reverse-mortgage loans on the East Coast for five years, will begin offering the loans throughout California in November.
The firm is already taking inquiries from potential borrowers, and plans to fund its first loan in the state by the end of this year.
Separately, the Federal Housing Administration will soon publish proposed guidelines for a reverse-mortgage program that it plans to begin operating early next year. According to details provided to The Times, the program will let borrowers choose from three different types of reverse-mortgage loans and will offer important consumer benefits that most current programs don’t provide.
Monthly Advances
Reverse mortgages are home loans that work backward. Instead of getting one lump sum that must be paid back in monthly installments, the loan is advanced in monthly increments.
The homeowner doesn’t have to pay any of the money back until the term of the loan expires or the borrower moves away. If the homeowner dies, the loan is repaid by the estate.
The concept has been praised by many advocates for the elderly, who say reverse mortgages could be a godsend for equity-rich older homeowners who need cash but have no way to pay the money back on a monthly basis.
However, lenders have been slow to offer the loans, in part because they don’t want to run the risk of foreclosing on an old person when the loan comes due.
American Homestead’s Individual Reverse Mortgage Account, nicknamed “IRMA,” solves that concern by allowing the borrower to stay in the house until he dies or decides to sell. At that time, the loan must be paid off by the homeowner’s estate or through the proceeds of the sale.
American Homestead will offer the loans to homeowners across California through local loan representatives working for the company’s headquarters at 305 Fellowship Road, Mount Laurel, N.J. 08054. Borrowers must be 62 or older, own and occupy a single-family home or condominium, and have little or no debt on it. Elderly owners of certain other types of property may also qualify.
Uses Two Examples
“We’ve been wanting to get into the California market for a long time,” said James Burke, American Homestead’s chairman. “I’m glad we’ve finally arrived.”
Burke used the examples of two 75-year-old widows--Smith and Jones--to explain how IRMA works. Each widow has a house worth $100,000, and each owns her home free and clear.
Based on their age, market value of their homes and amount of equity they wish to mortgage, the maximum monthly stipend the widows could obtain would be $496.
Smith wants the maximum, so she must agree to mortgage all of her equity and give up all of the future appreciation in her home. In return, she’ll get $496 monthly for as long as she lives in the house.
When the home is sold or Smith dies, all the monthly advances must be repaid, plus interest.
American Homestead would also get all the appreciation in the home’s value from the time the loan was taken out to the time the property was sold. The remainder goes to Smith or to her estate.
Leaving a Larger Estate
Jones, on the other hand, wants to leave a larger estate to her heirs and needs just $250 a month. So, when she moves out or dies, she or her estate will have to repay all the monthly advancements and interest, but will only have to give up half the appreciation that accrued between the time the loan was taken out and the time that it was repaid.
As with any other mortgage loan, IRMA loans require the borrower to pay appraisal fees, closing costs and the like. The monthly stipends are tax free, Burke said.
The reverse-mortgage program planned by the Federal Housing Administration would allow borrowers to choose from three different types of loan programs.
--A “tenure” mortgage, much like the IRMA program, which would allow a borrower to get monthly stipends for as long as he lives in the home. The money wouldn’t have to be paid back until the borrower moves out or dies, which would make this loan particularly attractive to someone who plans on staying in the house for the rest of his life.
--A “term” loan, which gives the borrower monthly stipends for a specified period of time. Although the loan will have to be repaid on a specified date, it may attract borrowers who need some monthly cash until a pension or annuity kicks in, or people who plan to eventually sell their house and move to a retirement home.
--A “line of credit” that will let a homeowner borrow money as it is needed and wouldn’t have to be repaid until the borrower moves out or dies. It would be the most flexible of the three loans, but the borrower would need discipline to avoid using the money all at once.
The FHA won’t actually make the loans, but will insure reverse mortgages made by private lending institutions. The insurance will reduce a lender’s chances of suffering a loss on its loans.
Limiting Interest
Importantly, the FHA would limit the amount of interest a participating lender could charge on some loans and would also limit the amount of property appreciation the bank could claim.
Under the FHA’s current proposal, a lender couldn’t ask for more than 25% of a property’s appreciation and the effective interest rate on the loan--including any appreciation profits the lender might keep--couldn’t exceed 20%.
Although most reverse mortgages currently available carry interest rates below 20%, their effective rates are much higher because the lender also gets some or all of the property’s appreciation.
The FHA will take public comment on its proposed program until next January. It will then make any necessary changes, and hopes to make its first loan under the program by the spring.
