The Effects from Covid on Reverse Mortgages
By Edward Brown and Mary Jo LaFaye
With the Covid crisis still looming, much attention has been focused on conventional loans where monthly mortgage payments are required. Recently, laws have been passed on both local and national levels to ensure homeowners are not evicted for non-payment on FHA loans.
Relatively little attention has been geared toward reverse mortgages during the Covid virus. Why is that? At first glance, the simple answer is that no monthly payments are required for reverse mortgages; thus, there is no risk for a foreclosure for non-payment of a mortgage. However, one needs to go deeper to understand that there could be a potential risk to the homeowner of losing their house in certain circumstances but for the foreclosure moratorium.
Many conventional borrowers have requested deferments from their lending institution as they fell on hard times with the loss of income during Covid. The need for deferment requests are all but eliminated for reverse mortgages.There has been a tremendous push toward applying for reverse mortgages by homeowners. There are many reasons for this; historically low interest rates mean that a borrower can obtain a much larger reverse mortgage, as the interest that gets added to the mortgage every year is less than in a high interest rate environment. Thus, the lower the interest rate, the better it is for the homeowner and, consequently, the less risk for the mortgage company. In addition, many older homeowners have lost their job during the virus, and their largest retirement asset, by far, is their home equity from which they can draw upon. These same homeowners not only may not qualify for a HELOC [Home Equity Line of Credit], they may not want them after considering the benefits of a reverse mortgage (HECM) vs. a HELOC. For one, HELOCs require monthly mortgage payments. In addition, unlike a reverse mortgage (HECM), the bank can freeze [or reduce] the HELOC line and not allow access to it. This puts the homeowner in a precarious position of having debt against their property [as the HELOC is recorded against the property for the maximum potential draw of the line] without any benefit. Such was the case during The Great Recession in the mid-late 2000s when $6 billion of HELOC credit was frozen in June of 2008, and the freezing continued for some time. Why? The answer lies in the fact that the fastest way for a bank to shore up its balance sheet is to freeze HELOCs, so they do not have to set aside reserves. During The Great Recession, banks were facing write downs and write offs of loans as the loans that they had previously written took a downturn when borrowers, during the credit crisis, were unable to pay their mortgage. When a bank makes loans, they use depositors’ funds. The government requires reserves [loan loss reserves] be set aside to ensure the return of those depositors’ funds. If a bank has existing loans outstanding, they cannot just call in those loans [unless borrowers default]; however, a HELOC is a “potential loan” as the loan technically only exists as the borrower draws upon it. In this situation, if they freeze [or reduce] the line, the bank has not lent the money yet and can stop it before the borrower accesses the money that was available to them.
Most major banks have seriously curtailed the issuance of HELOCs during the current Covid crisis, and those that continue to offer HELOC’s have imposed stringent qualifications to borrowers.Many borrowers are realizing reverse mortgages offer advantages over HELOCs in this regard. There are limited income and credit qualifications to obtain a reverse mortgage. Reverse mortgage (HECM) lines of credit cannot be frozen or reduced, and, since there are no monthly mortgage payments, the risk of foreclosure [even after the moratorium] is slim. A new situation has arisen due to Covid and that has to do with nursing homes. Once considered an alternative to in-home care [which is usually two to three times the cost of a nursing home], many stories have been published about the increase in deaths surrounding Covid and older Americans in care facilities. Most people would like to be in their own home instead of a care facility given the choice, but, unfortunately, many people cannot afford the [around the clock] care required to stay home and be cared for. Loved ones, especially during the virus, are looking for a way to keep their elders in the safety of their own home and receiving the quality and quantity of care they needed. Many are looking toward a reverse mortgage to fill this need. Many people have enough equity in their homes, especially as real estate has tremendously rebounded since The Great Recession, to allow them a large enough reverse mortgage to afford the costs associated with in-home care.
As Covid gets more impactful on the economy and on peoples’ lives in general, we should expect reverse mortgages to grow, and now seems to be the most opportune time to obtain one – before interest rates increase.
Edward Brown
Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.
