HECM To HECM refinancing-Helping Your Borrower Discover Whether It Is The Right Thing To Do

 Determining whether a particular borrower should proceed with a HECM refinance requires a systematic, diligent and earnest determination whether proceeding is in the best interest of the customer/client.  It is clear that many borrowers who received their reverse mortgage years ago may not be able to refinance their current reverse mortgage. Market conditions have changed and deteriorated so precipitously that a positive outcome can no longer be guaranteed.  The vortex of this country’s economic malaise has overridden the long established truth that older reverse mortgage loans can be effectively refinanced. This truth is fast turning into a myth for many HECM borrowers across the country.

Accordingly, I am concerned that too many reverse mortgage originators are requiring that borrowers pay for an appraisal before the originator will begin a serious review.  This is backwards.  The analysis must be done first. Requiring counseling and a new appraisal before this review has begun, shows a total disregard and disrespect for the senior client/customer.   The reality remains that many HECM home owners had no chance of ever squeezing extra funds out of the home; yet they incurred additional costs.

There are a number of items/variables of the original loan that should be of interest.  Here are some of the things that one should know:
Date of original HECM loan
Value of home at that time
Original Principal Limit
Current Principal Limit
Expected Interest Rate
Amount left in LOC (if any)
Net Principal Limit available
How borrower/client is receiving the money (Tenure, term, modified tenure, modified term)
Balance due on the loan

 After the numbers are obtained on the proposed HECM loan, one can begin the investigation into the efficacy of the proposed HECM loan.

When comparing the loans, it is not enough to look at the difference between the Principal limits of the two loans. I think that you would agree that a business cannot focus on income while ignoring expenses.  It is the same thing here. One must look at the whole picture.  The real focus needs to be placed upon the net amount the borrower can realize from the new loan. Remember that the original balance on the current loan has to be paid off with the new proposed reverse mortgage loan.  Because of the ratio/ counseling issues that arise, too much focus is placed upon these numbers. A proper benefit analysis is ignored.

If the borrower wishes to continue to receive tenure payments in the amount that is currently being received, focusing on the Principal limit difference between the two loans is irrelevant. Typically the tenure payment will be much higher with the old loan than with the new loan because the net available amount was much higher in the former.  

Over the years, many borrowers have depleted their line of credit and have had their term payments expire. In  cases like this, the net available amount, even if not substantial could serve the borrower well. On the other hand, if a tenure payment was desired, the borrower would fare better under the original loan.

A longer accrual period on the original loan (loan taken out a long time ago) coupled with much higher expected interest rates on the new loan, have severely limited the ability of the proposed HECM loan to work its magic.  The longer accrual period permits the negative amortization feature to increase the unpaid loan balance. The higher expected interest rates along with depreciating values, detracts from the new benefit amounts the new loan can give.

We have seen lower principal limits on the new loan when compared to the original loan.

Just because the difference between the principal limit on the two loans exceeds or equals 5 xs the cost of the new loan does not automatically mean that the proposed new reverse mortgage should replace the old reverse mortgage. The focus here is on the counseling requirement.

Depending on the neighborhood, a home value at or a little above/below the lending limit when the original HECM was taken out is probably close to that value now. Today’s higher limits will not be much help.

When attempting to discover whether a HECM to HECM refinance makes sense, there is much territory to explore. Having your borrower incur appraisal costs at the onset of this process is unnecessary and quite unprofessional.

Comments

[Rohit Mahajan]

There is never a wrong time to do a right thing, but think twice before you act, I mean, in today's world when the man is always thinking of having most out of others, one must think again before making any financial deal, especially the seniors. Reverse mortgage is good for seniors only if they have complete knowledge about the same.
One interesting article about reverse mortgage is http://www.housingnewslive.com/reverse-mortgage.php

[James E. Veale, CPA, MBT]

JC1941,

In reading the article you referenced, there were some interesting and informative parts. Unfortunately it also had several errors. If you would like more accurate information, go to www.reversemortgage.org. It is the consumer website of the National Reverse Mortgage Lenders Association, our trade association.

[JC1941]

I think the reverse mortgage allows a senior home owner to convert their home equity to cash. These loans may be availed by senior home owners having equity in their homes.

I read a really interesting article on reverse mortgage.

http://www.housingnewslive.com/reverse-mortgage.php

[Beth Paterson]

Dennis,
I totally agree with you! It is the fiduciary responsibility of the originator to review and discuss whether refinancing may be viable before having the borrower incur costs (i.e. counseling and/or appraisal). We as lenders should also bring to borrower’s attention that if they have funds in the line of credit it’s generally not necessary to refinance until those funds are all or at least nearly depleted. The discussion should also include that closing costs have to be paid again when they are refinancing.

Some of my borrowers have been contacted by other lenders about refinancing. My borrowers then often call me to see if they should consider refinancing. When I ask if that lender approaching them about refinancing asked if they had funds in their LOC – they reply “no” but I have $50,000 in my LOC. Then when I ask if they were told if they refinance they would be paying the closing costs again I receive the reply, “no.”

As you point out, refinancing can be valuable however originators should respect the seniors and discuss the option and the variables prior to the borrower incurring costs.

[James E. Veale, CPA, MBT]

Dennis,

You are right about incurring unnecessary costs. While it is not always possible to determine exact appraised value without the input of an appraiser, with a little effort it is possible to get approximations through Zillow, Cyberhomes, title company sales information, real estate salespeople with access to the local MLS, or even just asking appraisers for a nonbinding range of value or an estimate. No amount of effort short of an actual appraisal can prevent all unnecessary appraisals, gaining approximate value information will certainly cut back on some.

It is not only unnecessary appraisals that are of concern but also permanent changes in margins. To take a senior out of a 1% margin to a higher one (such as 4%) needs explanation and clarification by the originator. While there are many reasons why such a change is justified, there are also many why it is not. The potential increased interest (and resulting MIP) costs could be a potential difference in whether or not a senior chooses to refinance; ethical originators will point out such potential costs.