Reverse Mortgage Fine Print, Impound and Mortgage Insurance Changes

It is said that 90% of reverse mortgages are HECM’s (Home Equity Conversion Mortgage). Will the meltdown in home values affect holders of HECM FHA-backed reverse mortgages? HECMs come with a Federal Housing Administration guarantee that protects the lender and the homeowner from falling property values. Therefore, if the loan balance exceeds the value of the property, the homeowner is fully protected by the insurance policy that was paid for in the closing costs. Gray Panthers can rest assured that if the borrower chose a lifetime monthly payment, they will still receive a monthly check for life, even after the loan balance exceeds the property value. The lender or bank cannot take the property if the borrowers outlive the loan. The lender doesn’t own any part of your home and cannot call in the loan as long as you and/or your spouse choose to live in it, pay the property taxes and keep it up. Your heirs will not be forced to sell the home. They may choose to keep it, refinance and pay off the outstanding balance, which ordinarily will be less than the house is worth. But there are other options open to cash-strapped seniors.

Impounds…An impound account (also known as an escrow account) is still the borrower’s money, although the lender uses them to make the payments on homeowner’s insurance, property taxes, and mortgage insurance (whichever is applicable). Each month, in addition to the mortgage payment, additional funds are deposited into the impound account with the goal being for the lender to always have sufficient funds to pay the bills as they come due. It is rumored that starting Monday Wachovia will require impounds on all loans.

Franklin American will no longer accept Triad Guaranty Insurance as an acceptable provider of mortgage insurance for loans purchased by FAMC on or after June 2nd. Additionally, they will no longer accept Triad as an approved contract underwriter for loans purchased by FAMC on or after June 2nd. They also increased their underwriting fees after this date for conventional loans by an additional $75 per file, from $150 to $225 per loan.

Following MGIC’s changes, effective with MI applications received June 1st (“The following will no longer be eligible for MGIC mortgage insurance:

Expanded Criteria / A-minus loans, Reduced Documentation / Alt-A loans, Investment properties, Cash-out refinances, 3- to 4-unit properties, loans with potential negative amortization, Non-warrantable condominiums (per GSE definitions) & Condotels.”), HSBC joined in…

HSBC addressed mortgage insurance issues, and announced that “effective June 1, 2008 the following will no longer be eligible for mortgage insurance (loans with LTV greater than 80%): Expanded Approval loan (full doc and stated), Reduced Documentation / Alt-A loans (full doc and stated), Investment Properties (full doc and stated), Cash-out refinances (full doc and stated), 3 to 4 unit properties (full doc and stated), and Non-warrantable condominiums (full doc and stated).

Taylor Bean & Whitaker announced the release of their Freddie Mac Conforming Jumbo product.

Thornburg, expected to “get going” again in mid-June, announced that, “We no longer allow the Stated Income exception on non-owner occupied properties. All non-owner occupied properties must fall within our current credit guidelines, with no exceptions allowed.”

At least mortgage prices are doing well today – so far better by roughly .125-.250 versus yesterday afternoon. Yesterday, pre-CPI number, rates were worse, but then improved after a favorable CPI report showed inflation grew at a slower than expected pace in April. Gradually, however, stocks began to rally in spite of rumored bad news coming from bond insurance companies, and numerous investors had rate changes for the worse. This morning the number of workers filing claims for initial jobless benefits rose to 371,000 last week, up slightly from the 365,000 for the prior week – as expected. The four-week moving average of new claims fell to 365,750 in the week ended May 10 from 366,750 in the prior week. Later this morning we have Industrial Production and Capacity Utilization, expected -.3% and -.4%, the “Philly Fed” survey, along with several more Fed speakers.