Payment Shock: What Unnoticed Fallout From The Mortgage Lending Crisis Could Mean for You

For those considering a reverse mortgage, there's a lot going on in the industry right now that could affect whether many older Americans consider one or even be able to take one out.

The industry is expecting a boost from the fallout of the mortgage lending crisis over the last decade, offset by some rules changes for obtaining a reverse mortgage.

What's happening, says Shannon Hicks, president of Reverse Focus Inc., a firm that provides training and tools for reverse mortgage lenders and professionals, is that rising interest rates and home equity lines of credit or HELOCs are nearing their draw period.

"The reset of existing HELOCs and those written about 10 years ago are a ticking time bomb for those who overextended themselves or got into a HELOC not understanding the full impact of it later down the road when they enter the repayment period," Hicks says.

What's going to happen is those homeowners will see a payment shock - in some cases doubling, depending on the interest rate on the loan - and in many cases they will have their line of credit frozen. Hicks says.

"This is going to create a one-two punch for these individuals who want access to the liquidity but now are going to be saddled with the burden of a monthly payment for the debt service," Hicks says. "It's one of the lingering effects of the mortgage crisis that's gone unnoticed."

Some might gain from refinancing their existing home equity line of credit or their first mortgage, but some will find themselves limited if they have too high of a mortgage lien balance between the two to be able to get a reverse mortgage or Home Equity Conversion Mortgage (HECM), he says.

"The opportunity is there, and that opportunity will be mitigated in some sense by the rising interest rates that affect the principal limit on the HECM loan," Hicks says. "I don't think we will see a big uptick yet because people are slow to adopt, even in this situation with the home equity line of credit."

Hicks says he expects advertising will focus on this issue, and banks will be looking for opportunities with reverse mortgages to prevent people from defaulting.

In light of what's happening in the marketplace, Hicks says a reverse mortgage could be a right fit for many homeowners. If they find themselves hard pressed to make payments and are facing a default on their home equity line of credit, they should consider a HECM, he says.

"That will free up their cash flow," he says. "It might be their best option if they're tight on finances each month."

With a reverse mortgage, homeowners 62 and older receive a loan backed by the equity in their homes. The lender isn't repaid until the home is sold.

Reverse mortgages bounced back in 2013 in their best showing since the Great Recession in what some analysts say was tied to demographics and improvement in the housing market.

Industry publications reported that borrowers took out 20 percent more loans in 2013 compared to 2012 and reached $15.3 billion. That's still below the record of $30.2 billion in reverse mortgage loans in 2009.

Hicks says he expects the volume of reverse mortgages to be down this year by about 10 to 15 percent because of new guidelines put in place by the Department of Housing and Urban Development.

Gone are the days of qualification based on age, home value and available equity, Hicks says. Lenders now look at credit history and financial capacity as measures by income and monthly expenses.

"We are stepping into the world of traditional mortgage lending and doing more risk mitigation to prevent people from getting a short term fix that could blow up later on," Hicks says.

As people understand the rules better, the industry will see an increase in HECMs, Hicks says. The industry has a good future, and Hicks says some lenders are already changing how it's marketed to focus more on the actual name of HECM rather than reverse mortgage, which has a stigma for some.

"Many individuals that can be helped today outright reject it because of the name," he says. "But more lenders are switching."

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