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Last year, Bank of America bought out Reverse Mortgage of America (formerly Seattle Mortgage) becoming an instant player in reverse mortgages for seniors. With perhaps the largest brand of any bank in the business, they brought instant credibility and a wide distribution channel through their retail and reverse mortgage wholesale divisions.

With such size and market clout, Bank of America because an immediate competitor to Financial Freedom, the largest reverse mortgage bank and to the newly formed Countrywide reverse mortgage program. In fact, Bank of America’s reverse mortgage jumbo program was, at least until recently, arguably the most competitive program in the business.

But the credit crunch has had battered all mortgage lenders over the past 6 months and Bank of America is no exception. Reverse mortgage lenders have, one by one, recently been making their jumbo reverse mortgage programs more restrictive and less competitive. Bank of America has now followed suit with their announcement this month to their brokers that jumbo reverse mortgage loan amounts will be reduced by 5% is most major California markets. The move applies to many other markets across the country that are deemed to be declining in value.

This means that seniors will be able to take out 5% less cash, or have a 5% lower credit line on their jumbo reverse mortgage than they could last month. In addition, Bank of America will no longer offer the no-fee reverse mortgage option that was available to seniors who had a large initial loan balance.

I will keep an eye on new developments in the reverse mortgage marketplace and report them here on this reverse mortgage blog. You can also check here for more info on California reverse mortgages.

Financial Freedom, the reverse mortgage subsidiary of mortgage lending giant Indy Mac Bank, has dramatically increased the interest rate on its fixed rate reverse mortgage.

As many brokers discovered recently when they updated their Reverse Mortgage Analyzer (RMA) software with Financial Freedom, the leading lender has bumped their fixed-rate reverse mortgage interest rates from the mid 5% range up to 6.81% (rate current as of Friday).

Other reverse mortgage banks are still offering the fixed rate reverse mortgage below 6%, though their rates have recently been increasing too.

With all the recent turmoil in the credit markets, it is no wonder that lenders are tightening their belts and increasing the rates that they offer to consumers. As their balance sheets bleed red ink and their stock prices drop, lenders are forced to make up their losses wherever and however that they can. So they have turned to their reverse mortgage programs to find more profit. As such, even the adjustable rate reverse mortgage programs have seen an increase in the margins – the profit margin – to the lender.

A few months ago, a 1% margin added to the treasury bill rate was common for the FHA Home Equity Conversion Mortgage (HECM). Today, a 1.5% margin is standard. This situation is likely to continue, and perhaps even get worse, until banks are able to recover. And that is not likely to happen until the real estate market recovers – a turning point in the future whose timing is anyone’s guess.

This is part 4 and the last post of this series.

Perhaps the senior is making ends meet, but would be borrowing on their credit cards, or from their kids, or depleting precious savings for other significant expenses such as home repairs or medical bills. In that case, a reverse mortgage home equity line of credit would provide the financial security of knowing that the funds are there when they are needed. Remember that with reverse mortgage line of credit, the money simply sits in home equity and does not begin accruing interest until it is used. Once a draw is made, there is no burden of payments or risk of rising interest rates pushing the payments sky-high as with a traditional home equity line of credit.

On the other end of the spectrum are the well-off and financially savvy. Their investment portfolios perform well and provide all the income that they need. These seniors know the power of leveraged investments and compounding returns. They might take out a reverse mortgage and invest the money where they know that they can get a rate of return that is greater than the interest rate on the reverse mortgage. Borrowing money at 6% to get a return of 8% or more makes sense every time.

The wealthy use the reverse mortgage as a prudent estate planning tool. By accessing their home equity, they are able to begin transferring more of their wealth to their heirs. Such a strategy gives them direct control over how their money is distributed, allows them to enjoy the giving process, and can dramatically reduce the estate tax burden.

A reverse mortgage should be considered by all homeowners over age 62. While not for everyone, it is a powerful financial tool that should not be dismissed without understanding how it could apply to each senior’s individual situation.

This is the third post in a series.

Now let's look at a few of the situations where the reverse mortgage makes perfect sense. Clearly, if the senior could benefit from extra monthly cash flow in any way, the reverse mortgage is a potentially good option. AARP reports that 44% of people over age 60 have saved less than $75,000 for retirement and cite social security as their primary source of income. Fortunately, these numbers exclude home equity. With life expectancy much greater today than 20 years ago, it is evident that many seniors simply do not have enough money to fund their lengthy golden years. For them, the cash flow or a home-equity line of credit "nest-egg" from a reverse mortgage could be a great thing.

In many cases, health and related expenses become an issue. Some seniors have had many relatively care-free years, depending on their social security income and a little savings to cover their bills. But recently medical issues have started cropping up and as time marches on, the potential of more problems only increases. The senior might try applying for long term care insurance, but find that the opportunity passed back when they were 50 years old and healthy. Now the prospects of paying for proper medical care (even the deductibles), in-home care, and prescription drugs are daunting. The smart and prudent move would be to plan ahead and obtain the reverse mortgage in order to be financially prepared.

As a lump sum, the senior could use the reverse mortgage to pay off an existing mortgage, and increase their monthly cash flow by hundreds, or even thousands of dollars each month. Or they could use it to pay for home upgrades to improve the accessibility and mobility in the home. Some have even used the lump sum to purchase a second vacation home! There are a million uses for additional funds.