HOME EQUITY CONVERSION MORTGAGE (HECM) A/K/A REVERSE MORTGAGES

By Albert F. Pennisi, Esq., Pennisi Daniels Norelli LLP

I have received numerous inquiries concerning HECM loans (also know as “reverse mortgages”) for cooperatives, which are in actuality bank loans to tenant/shareholders in cooperatives, wherein the tenant/shareholder borrows against the equity in his/her cooperative apartment (hereinafter the “Reverse Loan”).

A Reverse Loan is one wherein a tenant/shareholder, who must be at least 62 years old, may borrow against the equity in his/her cooperative apartment. The specifics are in part as follows:

1. A Reverse Loan enables senior tenant/shareholders to convert part of the equity in their apartment to provide them with an income stream. The tenant shareholder may be paid a lump sum or monthly payments.
2. There are no required payments of interest or principal on the loan until the apartment is sold, the tenant shareholder permanently moves out of the apartment or the last of the tenant/shareholders dies.
3. Approximately ninety percent (90%) of all Reverse Loans are insured by the US Department of Housing and Urban Development (“HUD”) through the HECM statutes. In addition banks offer jumbo Reverse Loans,” which are not HUD insured.
4. A Reverse Loan is a “non-recourse loan” which means that the borrower can never owe more than the value of the cooperative apartment, regardless of the loan balance.
5. The title to the shares of stock remains in the tenant/shareholders name, subject to the pledge of the stock and lease as security for the loan.
6. If the cooperative consents to the said loan and signs a bank Recognition Agreement, there is very little risk to the Cooperative in that: (i) the bank does not become the owner of the apartment; (ii) the Cooperative maintains a first lien on the apartment, requiring the tenant/shareholder and/or the bank to pay the Cooperative any monies due and owing for maintenance (rent); (iii) the loan is limited to a percentage of the apartment's value; and (iv) the loan facilitates the tenant shareholder, with limited income, to pay his/her maintenance (rent).
7. The amount of the Reverse Loan is approved based on the age of the tenant/shareholders, e.g.: an 80 year old shareholder would be able to borrow about 42 percent of the apartment's value; a 75 year old shareholder would be able to borrow about 32 percent of the apartment's value. In addition to age, the amount of the loan is based on location, the value of the apartment and prevailing interest rates.
8. A 63 year old borrower with a home valued at three hundred sixty thousand ($360,000.00) dollars can be paid one thousand one hundred ($1,100.00) dollars per month or one hundred seventy seven thousand ($177,000.00) dollars in a lump sum payment. A 75 year old borrower with a home valued at three hundred sixty thousand ($360,000.00) dollars can be paid one thousand five hundred ($1,500.00) dollars a month or two hundred twenty two thousand ($222,000.00) dollars in a lump sum. Be advised, these are only estimated examples.
9. Applicants are required to go for independent counseling by an advisor approved by HUD, in federally guaranteed Reverse Loans. Lenders providing non-federally insured Reverse Loans, generally require counseling as well.
10. The interest rate charged on a Reverse Loan is approximately five percentage points above the LIBOR (London Interbank Offered Rate) currently about four percent, or a total of nine percent. Interest is not tax deductible until you pay off the loan.
11. In addition, there usually is an origination fee of one to two percent of the amount borrowed, 0.5% service fee, lien search fee, plus appraisal fees and legal fees. In addition, there is a fee for HUD insured and guaranteed HECM loans of 2% (two) percent.
12. Under federal rules there is a limit on HUD guaranteed HECM loan products for HUD insured Reverse Loans. The current limit in urban areas is $362,790.00. In addition there are non-HUD insured jumbo HECM loans where there is no limit on the loan amount and it is solely based on the borrower's age and the value of the property.

Banks currently offering Reverse Loans are: National Cooperative Bank, IndyMac Bank Corp. and Wells Fargo Bank.

top