Reverse Mortgage Lenders Implement New Locking Mechanism to Safeguard Consumer Funds

Reverse mortgage lenders, with approval from the U.S. Department of Housing and Urban Development, have implemented a new consumer protection called the "principal limit lock" which freezes the “expected interest rate” on federally-insured Home Equity Conversion Mortgage (HECM) reverse mortgages for a period up to 60 days from the date of application. The expected interest rate is utilized to calculate the amount of funds available from a HECM reverse mortgage, according to the National Reverse Mortgage Lenders Association (NRMLA).

NRMLA developed a model disclosure (which lenders are now using) that explains to consumers how the principal limit lock works. The HECM program is the most popular of all reverse mortgage programs, accounting for over 80% of the loans closed in the U.S.

The “expected interest rate,” is a critical factor that is used to determine how much equity an elderly homeowner is eligible to receive from a HECM. It is calculated by adding a pre-set “margin” to the 10-Year U.S. Constant Maturity Treasury rate. The 10-Year U.S. Constant Maturity Treasury rate is published weekly by the Federal Reverse. The margin that is added is currently 1.5% for monthly-adjusted loans and 3.1% for annual-adjusted loans.

Prior to the implementation of the principal limit lock, if rates increased between the time of application and the loan closing, the borrower received less money.

"This is an important new feature designed to make the HECM program more consumer-friendly," said Peter Bell, President of NRMLA. "Interest rate fluctuations over the past several years have benefited some reverse mortgage borrowers, but hurt others. This principal limit lock protects borrowers in a rising rate environment, yet let’s them benefit if rates are lower at the time of closing."

If rates decline between the date of application and closing, the homeowner can utilize the lower of the two rates and receive more money than what was originally quoted. If the loan closes after the 60-day lock expires, the prevailing interest rate on the actual date of closing is used, regardless of whether it's higher or lower.

HUD issued regulations in March 2003 permitting the use of the principal limit lock. Since then, NRMLA members have worked to carefully develop a program that benefits consumers and is acceptable by Fannie Mae, the nation's largest investor in reverse mortgages, including HECM loans.

A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home, without having to sell the home, give up title, or take on new monthly mortgage payments. Loan proceeds can be used for any purpose, and taken out as a lump sum, fixed monthly payments, line of credit (except in Texas), or a combination. The loan amount depends on the borrower’s age, current interest rates, and the value and location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s estate.

A senior’s home does not have to be owned free and clear to qualify for a reverse mortgage.

NRMLA distributes a free information booklet on reverse mortgages, called “Just the FAQs: Answers to Common Questions About Reverse Mortgages.”

The Web site has extensive information on reverse mortgages, a state-by-state list of lenders, and a reverse mortgage calculator. To be listed on the NRMLA website, a lender must agree to abide by the Association’s Code of Conduct and operate in accordance with its Best Practices.

NRMLA is a nonprofit trade association, based in Washington, D.C., whose members make and service reverse mortgages throughout the U.S. and Canada. Members sign a Code of Conduct pledging to abide by guidelines that assure fair, ethical, and respectful practices in offering and making reverse mortgages to seniors.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.