Unless you are in the mortgage industry, you probably haven't heard about the Mortgage Insurance Industry is experiencing HUGE losses.  Public company MGIC Investment Corp-symbol MTG just announced today that they lost 1.5 BILLION DOLLARS LAST QUARTER ALONE.  PMI Group-symbol PMI and Radian Group Inc-RDN might be next.  They haven't announced their earnings yet.  Since they are all in the same business it might be a logical inference to assume they will be announcing less than positive news.

What PMI did do this week is send out a letter to mortgage broker clients like myself with a guideline change effective for March 1st.  Basically, they are not going to be insuring the all the same loan programs at the higher loan to value 100% limit that they once did.  They are also raising their cost of insurance.  What does this mean to a consumer?  YOU need to buy now before the programs change. Most companies will allow you to close on an older approved program at the lesser cost mortgage insurance, as long as you are approved with a mortgage certificate by a certain date.  PMI told me when I called them that I needed to have my client's mortgage insurance certificate in hand by March 1st.  Some area of the country are also being designated as declining areas, this too is a reason the insurance companies are stopping to provide insurance for high loan to value loans.  If you are a first time buyer-it's time to take action.

The higher cost of MI and greater down payment requirements are defensive measures put in place because of all the foreclosures and defaults in mortgage loans.  I can't blame the mortgage insurance companies, in fact I commend them for being proactive and protecting their business.  At the same time, if you are a buyer who needs the maximum amount of financing-such as 100%-you might not be able to get it.  Not all programs are affected by this change and not all mortgage insurance companies have changed their guidelines-YET.  The window of opportunity is here and now.  This lack of liquidity will remove more potential buyers from the real estate marketplace and make the inventory of unsold homes that much worse.  That in turn will put more pricing pressure on the existing inventory of homes.  What a viscous cycle. 

We have been in this business since 1986.  We've seen something similar in the real estate and mortgage markets back in 1989-1991 during the Resolution Trust days and the first Gulf War.  This time it seems a little more severe in nature.  If you are contemplating buying, NOW really is the time to buy, especially if you need underwriting flexibility or a low down payment program.  Visit my Minnesota real estate site to begin an online search for a new home.

With the market being a little slower, you might want to look at a new buyer that you may have never considered.  Think about the senior homeowner as a potential buyer using a REVERSE MORTGAGE.  First let's talk about what a reverse mortgage is and how they work. 

For many seniors, home equity is roughly 30-40 percent of their net worth. They are house poor often times and don't have the available funds to make repairs. If you and your spouse are both at least 62 years of age and have significant equity in your home, a reverse mortgage can turn that equity into tax-free cash without forcing you to move or make a monthly payment.  YOU DON'T NEED A JOB AND YOU DON'T NEED CREDIT! Age and equity are the only qualifying factors.

A reverse mortgage can be a worthwhile financial tool if used correctly. At the same time, you could make some serious mistakes with your financial future.  For example, you don't want to take your equity and run down to the casino. 

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

· A lump sum cash payment;

· A monthly cash payment;

· A line of credit (which tends to be the most popular option);

When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs.  Heirs don't have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for. Unfortunately, heirs often discourage people from getting a reverse mortgage because they are afraid of losing their inheritance. 

There are three basic types of reverse mortgages:

· Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;

· Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);

Some loans are conventional loans, some are proprietary loans held by certain lenders and some are insured by FHA. The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county. The amounts vary from $200,160 in rural areas to $362,790 in many major metropolitan areas. In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the FHA mortgage limits can be adjusted up to 150 percent of the ceiling based on the area. If the FHA modernization Act is passed, it is possible that the FHA loan limit will be raised.  This would be great, since it seems that FHA is the mortgage loan that generally gives more equity to the senior.

Reverse mortgages have traditionally been chosen by older Americans who can't cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home health care services, home improvements or to pay off their current mortgage or credit cards greater than their income can support. More recently, though, they've become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes. Evaluate with the help of a financial adviser if reverse mortgage funds can be used to restructure estate taxes.

You will have to consult with a financial planner before you're granted this loan - that's one of the requirements. You might consider a CERTIFIED FINANCIAL PLANNER^TM professional to do this because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300- $500.  There is required counseling to make sure that you are making the right decision for you.

Here are other things to consider-some of these are risks:

Cost: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can run between $12,000 and $18,000. The loans are based on anticipated home value appreciation of four percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

You'll need to make sure you're not endangering your federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if your total liquid assets exceed allowable limits under federal guidelines, you might endanger your benefits. This is another critical reason to work with a financial planner on this decision.

Rates: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount you owe each month.  Again, check the total annual loan cost.

Your mortgage can be called due and payable: The homeowner or estate always retains title to the home, but if you fail to pay your property taxes, adequately maintain your home, pay your insurance premiums, or change your primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

Did you know that you can actually use a reverse mortage to buy a house?  How do you do it?  Let's take an example:  maybe you sell you are a senior that sells their home and nets 300K.  Next they can go buy a new home for about 500K, by putting down 300K, and financing the other 200K with a reverse mortgage.  Maybe a senior would like to move from their older house of many years to a new condo or loft. This would be a great way to do it.

Talk to your kids as their ignorance of this product may cause them to give you bad advice. If your house is your major asset, getting involved in a reverse mortgage may not leave much to the next generation - if it appreciates, there may be some difference that the kids can have. That's why that in addition to discussing a reverse mortgage with a financial adviser, seniors need to talk with their family.

You can find out more information at our mortgage website or at the specific reverse mortgage page.