The problem with the article above and its quotes and comments are — they are dealing with different provisions of HERA. Subsection 255(o) of the National Housing Act was added by HERA 2122(a)(9). The article paraphrases that subsection and then despicably treats the paraphrase as if it were a quotation of law. I agree with the paraphrase but not that it was treated as a direct quotation of Subsection 255(o).

Subsection 255(o) has nothing to do with HERA’s requirements on originators. Neither the law nor HUD addresses firewalls or requirements on originators as to Subsection 255(o). This subsection is a prohibition on the required purchase of other products when originating HECMs and that is all it is.

No mortgagee letter addresses Subsection 255(o). I am not an attorney nor am I so experienced in the industry as to know if HUD has to do one single thing in the way of implementing Subsection 255(o) in order for it to be fully enforceable. In all likelihood this provision became enforceable when it was enacted, July 30, 2008. I would love to hear from HUD’s Inspector General (IG) as to the IG’s opinion on whether any mortgagee letter must be implemented in order for the IG’s office to act IMMEDIATELY against those who violate Subsection 255(o). I have emailed Peter Bell asking him to opine on this subject.

It is new Subsection 255(n)(1) of the National Housing Act which was also added by HERA Section 2122(a)(9) that addresses requirements on originators and attacks cross-selling by looking at the activities in which originators may be involved. This subsection and HUD Mortgagee Letter 2008-24 deal with who can originate; it also provides for firewalls. As many know already, it was Subsection 255(n)(2) and Mortgagee Letter 2008-24 that eliminated the — so euphemistically named — “HECM Advisor Program”.

The first paragraph of the article looks like it focuses on Subsection 255(o) and remarkably the discussion quickly devolves from there into a spirited discussion of Subsection 255(n). Unfortunately the author makes it appear that a chief compliance officer (CCO) of a lender is leading the way; I just hope the CCO was not misinformed about the topic.

Mr. Morse introduced the subject but appears to have misdirected or have been misdirected into an entirely different area of HERA. HERA has a two pronged attack against cross selling, Subsection 255(n)(1) and Subsection 255(o) of the National Housing Act. These subsections are also codified as 12 USC Section 1715z–20(n)(1) and (o).

Anyone violating Subsection 255(o) should be reported to HUD immediately. Not only that but if anyone is selling annuities in the state of California with any type of reverse mortgage in violation of California Civil Code 1923.2(i) that person should be immediately reported to either the California Department of Real Estate or the Department of Corporations depending on how the employer of the violator is licensed in California. I wish the quoted CCO had stated this; she should have. But then maybe she did and Mr. Morse failed to publish her complete statement. Who knows?

With all due respect, it is unfortunate you have not looked into these matters far more deeply. As a CPA your insights would add much to the discussion.

Everyone seems to focus on the economic and monetary issues regarding annuities but there are many other issues. For example, what happens when the annuitant passes away? If the annuity is not for a term certain, has no survivor aspects to it, and provides little or no death benefits, the economic value of the annuity at the passing away of the annuitant is little or nothing. So if the husband acquired such an annuity with a HECM (or any other reverse mortgage for that matter), the house would be mortgaged but neither the wife nor the estate would have any benefits from the annuity upon the death of the decedent, husband. Although generally unexplained, risk tolerance is a huge issue.

Who is insuring that the annuity covenants will survive the provider in case the provider terminates or goes into bankruptcy? Talking about an appetite for risk, I know of few seniors who would even consider an annuity if such information were disclosed in an honest, open, and frank evaluation of annuity products. HECM tenure payouts have the full guarantee of FHA. Of course the same question could be asked about tenure payouts on proprietary products – who insures them?

What about the tax bracket of the annuitant? Surely some annuitants will find annuities far more appealing than others; those in lower tax brackets will see much more in the way of cash flow from an annuity than those in higher brackets. Generally HECM proceeds will never be taxable although don’t tell that to those who originated in 2005-2007 and will terminate their RMs through foreclosure or trustee’s sale with a gain that is not entirely excluded under the limited gain from the sale of a principal residence rules.

If reverse mortgage proceeds will ultimately be taxable, they will be far more likely to be taxable to those who use proceeds to buy annuities than those who avail themselves of tenure payments. The reason is the vast majority of HECMs terminate within 10 years of closing and the balance due on a HECM that used all available proceeds to acquire an annuity will generally be much higher than that of one that took tenure payments.

Of course annuities are portable while HECM tenure payments are not. This is the unique value of an annuity over HECM payouts but may, in fact, be de minimis if the annuity is for a term certain.

Even if one gets an immediate annuity, what happens if the annuitant needs more money and the only source is the annuity? Most annuities, deferred or not, have some penalty provisions in these situations. HECM tenure payments have no penalties, just the logical reduction to the ongoing tenure payments.

Unlike you or me, one CPA wrote a book not long ago on reverse mortgages and advised that if the annuity paid more than the tenure program, get the annuity. This is absolutely the most derelict advice in print on when it is appropriate to get an annuity over tenure payouts. He gave no rational for his conclusions and admitted he knew little about annuities. It is, however, a truly great handout for the “bogus reverse mortgage originators” who sell annuities with little or no understanding of either product.

Now a more fundamental question, what is the additional risk to FHA? As a CPA if I am advising a senior who has any amounts available in his/her credit line and if the credit line is completely drawn down, the amount then due will substantially exceed the value of the home, would I not advise my client to take out those proceeds, especially if the senior was about ready to terminate the HECM? This additional risk argument is “for the birds.” It simply does not exist. See if you can find “the additional risk to FHA.” I can’t.

About four years ago, I was in one of my first marketing meetings on reverse mortgages. One originator stood up to proclaim the enormous benefits of selling annuities with HECMs. Of course all of the benefits were to the originator. Then from nowhere one originator who was trying to convince the world that there is a calculable ROI (return on investment) from “investing” in HECMs jumped to his feet to say he was licensed to sell annuities. When asked what products he was licensed to sell, he said: “I don’t remember but if the commissions are that good, I want to be in on it.” Telling, isn’t it?

This process could perhaps be managed by the closing agent at funding and by the servicer for the balance of the 90 day period? No disbursement without the additional certification and correction of the TALC?

I hate more regs. The problem is, we need them.

Shannon, we also have several lenders here in Florida happily announcing in public that they have alliances with Insurance agents. They must not read the same mortgagee letters we do.