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A Jumbo Mortgage That Works In Reverse

A new jumbo reverse mortgage option has finally surfaced for seniors with higher-value homes who have been seeking to tap more home equity than the federally insured FHA program can offer.

The Generation Plus Loan now available through Atlanta-based Generation Mortgage, targets owners over 62, with homes appraising between $500,000 and $6 million.

Unlike the popular Home Equity Conversion Mortgage (HECM) offered by HUD, the jumbo reverse mortgage requires no mortgage insurance but the interest rate on the program is higher.

According to Jeff Lewis, chairman of Generation Mortgage, the new offer not only fills a niche for current seniors, but it will also serve aging boomers who are still raising children and helping to support their own parents.

This “sandwich generation” will eventually need a way to halt their mortgage payments and stay in their homes even though they still have a mortgage. Homeowners with existing mortgages can qualify for a reverse mortgage.

“I was at a conference where attendees were asked if they, or their parents, had a reverse mortgage,” Lewis said.

“No hands went up. When they were asked how many were writing a check every month to help their folks, more than half the people in the room raised their hands. For most of their parents, a reverse mortgage would make sense.”

A majority of seniors are better served by the HECM. Not only can customers receive the funds in a variety of ways (lump sum, monthly draw, line of credit, or a combination) but the interest rate on that fixed-rate product, at the time I wrote this column, was about 5.5 percent. The upfront mortgage insurance brings the actual rate closer to 6.75 percent.

The Generation Plus loan carries a fixed rate of 7.78 or 8.78 percent, depending on the program. All funds must be taken at closing. A minimum FICO score of 700 is required.

Why is a credit score critical in securing a jumbo reverse mortgage? Since there is no mortgage insurance requirement, the institutional investor supplying the funds for the loan wants assurance that the property owner has the ability to maintain the property and pay taxes and insurance, especially in a slumping market.

“While customers can use reverse mortgage funds any way they please, the funds do not come without obligations,” Lewis said.

“The owners are obliged to keep up the property like the other properties in the neighborhood. Since there is no mortgage insurance to protect the lender, the lender wants some assurance that the owner will continue to maintain the property when there is a potential for a negative adjustment (value decreases).”

Jumbo reverses first became available in 2000 when Financial Freedom introduced its Cash Account reverse mortgage. Since then, jumbo products brought to market by Seattle Mortgage (acquired by Bank of America), Senior Lending Network, Sun West Mortgage and Bank of New York (now MetLife) and others were beginning to pick up momentum and a sliver of market share.

The credit crisis decimated the jumbo reverse market in 2008. Wall Street investors not only were shy about buying loans secured by real estate, but they were also opposed to acquiring jumbo packages.

Lehman Brothers, which filed for bankruptcy protection in September 2008, was the world’s biggest supplier of jumbo reverse mortgage funds. The Senior Lending Network offered its Equity Plus Advantage program and its Simple 60 plan (minimum age 60 years, rather than 62) until its Belgium-based parent, KBC Group NV, announced an open-ended moratorium on the products.

Also screeching to a halt were the Rex Agreement and Equity Key, financial contracts whereby the homeowner trades a portion of future equity for a cash payment today. They were intriguing options for savvy investors who believe they can realize a greater return on investments than on home appreciation. The Rex Agreement was backed by troubled insurance giant AIG.

Equity Key is similar to the Rex Agreement. The main differences are that the Rex Agreement has no age restriction while Equity Key is aimed at homeowners 65-85.

“The No. 1 priority of seniors is they want to stay at home as long as possible, and it’s the least expensive place for them to be,” Lewis said. “The Generation Plus simply gives more of them an opportunity to do so.”