Irresponsible Reverse Mortgage Reporting From Consumer Reports
August 20th, 2009 | by Jim Veale Published in Commentary, News, Reverse Mortgage | 16 Comments
The September 2009 issue of Consumer Reports (CR) contains what CR labels an investigative report on reverse mortgages, titled “Reversal of Fortunes.” Its subtitle is: “The next financial fiasco? It could be reverse mortgages.” It is a lengthy article which makes many accusations while covering an array of subjects all without any of the earmarks of a true investigation. The author makes some legitimate criticisms but by and large the article makes a mockery of investigative reporting.
The following are some of the more significant accusations in the article:
- “…those loans can be terrible for customers who don’t understand the complicated rules … and how quickly high fees and interest charges can balloon. They can end up stranded in their homes without any remaining equity to cover unexpected costs later in life.
- “Use of the loans is exploding as lenders—who shoulder almost no risks—push them to the growing ranks of retired baby boomers, especially for spending on vacations, new cars….”
- “Marketing can be misleading. Too often sales pitches emphasize the positives and play down the high costs of the loans.”
- “Lawmakers and regulators are getting worried.”
- “Loan bailouts have soared. The annual sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled in four years, from $81.3 million in 2004 to….”
- “Taxpayers are being tapped to subsidize reverse mortgages for the first time. Usually, insurance premiums paid by borrowers have covered bailouts of mortgages by the fund.”
- “Unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to buy financial products such as deferred annuities that can be inappropriate for their situation.”
- “And the required counseling for the mortgages can be far too skimpy.”
To prove the first point, the author tells the story of a Mr. Minor who was not yet 62 in late 2005 when he went off title so that his wife could get a reverse mortgage to pay for her medical bills. Two years after her death, Financial Freedom told him to vacate his home. The balance due is now over 50% greater than the current value of the home. The author cites that HUD warns against doing what Mr. Minor did. Yet the author does not report any effort to confirm if either the counselor or the originator warned Mr. or Mrs. Minor or if anyone discussed MediCal (Medicaid in California) or any other government programs with either Mr. or Mrs. Minor. Where was this part of the investigation?
The author uses another anecdote to clarify how seniors do not understand how quickly the loan can grow. An heir claims that the now deceased borrower would never have borrowed the money sixteen years before if the decedent had known that the heir could not afford to acquire the house from the lender. The writer does not report any effort to prove or disprove what the heir claims.
It is obvious the writer has either never read the high borrower satisfaction reports on reverse mortgages or just finds them ‘inconvenient’ to investigative “reporting”.
“Use of the loans is exploding…” shows the preference of the author for the inflammatory over facts. While 2005, 2006, and 2007 can be said to have been “exploding”, 2008 and especially 2009 have essentially plateaued. This information is readily available but it is ignored in the article.
The author labels industry ads “enticing.” The “investigator” reports: “At a March 2009 industry conference in New York City, one speaker delivered advice on the ‘10 Commandments for Selling to Seniors,’ including beginning the pitch with appeals to emotions rather than reason.” The author seems to advocate that we should downplay the positive aspects of reverse mortgages. Maybe CR should apply the same marketing standards to itself? The author implies that few, if any, marketers/originators review the Good Faith Estimate with seniors or spend any time going over the financial schedules or answering in depth cost questions with borrowers which is utter nonsense.
By now it should come as no surprise that the only lawmaker this author quotes is Senator Claire McCaskill (D-MO). The Senator states among other things that reverse mortgages are going to be the sequel to subprimes and the HECM program will end up being a huge liability to American Taxpayers. The only true reverse mortgage regulator the author quotes is Meg Burns but where is this alleged worry in her quotes?
What is the additional risk that HUD is undertaking when it buys the loans that are assigned to it? Does the author really understand assignment or for that matter risk? There is no indication that this investigative reporter even asked Meg about this subject.
In trying to prove how costly MIP actually is, the author confuses upfront MIP with the origination fee: “Borrowers pay hefty premiums for the federal insurance backing these loans—up to $6,000 up front plus fees that equal 0.5 percent of the principal amount each year—but lenders reap the benefits.” It is also obvious that the investigator does not understand the mechanics of the MIP charged on the HECM outstanding loan balance monthly; however, the author does not fail to take a shot at lenders.
The author also gives an incomplete example from which it is concluded that the “maximum available upfront” is $182,541. In part this investigator states: “That 74-year-old reverse-mortgage borrower living in a $300,000 house could expect to pay about $15,000 in up-front costs … plus another $15,000 over the life of the loan in monthly insurance premiums and servicing fees. That’s $30,000 in fees, or one-sixth the amount borrowed.” This type of imprecision is being passed off as “investigative.” Is the $182,541 the principal limit (PL) or the PL after the servicing fee set aside and upfront costs? While upfront costs and funds for the servicing fee are taken from the principal limit, the monthly MIP is not. While citing critics who do not like the information on the Amortization schedule but provide no alternative, the author tells borrowers what they can expect in accrued monthly MIP and servicing fees without providing any information on how the amount was computed including the timing of payouts, the effective note rate, or the life of the HECM.
As to the current budget subsidy request, the author has concluded that American taxpayers have been tapped even though the request has not been approved. As to the HECMs endorsed in any particular fiscal year can the author actually demonstrate that MIP revenues have been sufficient to offset losses in total over the life of all HECMs endorsed in that year? The author is comparing fiscal year cash flow to projected net income for budget purposes! This sloppy effort is being passed off as an “investigation”.
The accusation about borrowers becoming cash cows is a legal and ethical question for those who hold licenses to sell deferred annuities and financial and other insurance products. CR has allowed this author to use its magazine to paint all lenders and “others” (whoever those “others” are) with the same brush and paint. By labeling this an investigative report, CR has stepped into the shoes of accusing “lenders” themselves of such practices. The question now becomes, can either CR or the author be sued for libel?
The author tries to sell the idea that the deferred annuity problem is a wide spread reverse mortgage issue with yet another anecdote involving borrowers in California. It seems a California couple purchased clearly inappropriate deferred annuities in a MediCal eligibility plan financed through their reverse mortgage. The borrowers make it clear that an attorney whom the originator introduced to them created the plan. Since mid 2006, reverse mortgage originators cannot sell or refer borrowers to anyone for the purchase of an annuity under California Civil Code Section 1923.2(i) before the rescission period expires. No mention of this California safeguard is provided in the report. It seems the anecdote is more of a malpractice case against an attorney and an insurance licensee than one involving the reverse mortgage industry as a whole. To the extent that the reverse mortgage originator was knowingly complicit in this arrangement that person should be held responsible.
The author cites the recent GAO report on counseling and concludes that counseling is inadequate. The article ends with a meager attempt at discussing alternatives to reverse mortgages. Counselors are normally far more responsible in what they present than this reporter. The brevity and lack of significant analysis and comparisons betrays the real intent and purpose of the article.
It is unfortunate that Consumer Reports labeled an obviously biased opinion piece, an “investigative report”. Because of the generally perceived objectivity of CR “investigative reports”, we will no doubt be hearing about this irresponsible reporting as if accurate from many prospects for months to come.
James E. Veale, CPA, MBT
SVP of Tax and Government Affairs & Director of Originator Recruiting for Security One Lending
- Related Posts
- Consumer Reports Puts Reverse Mortgages On Its List of Financial Scams, Why?
- Consumer Reports Investigative Report on Reverse Mortgages, Hardly Balanced
- Federal Reserve Reports on Expansion of Reverse Mortgage Market
blog comments powered by Disqus .
August 20th, 2009 at 12:27 pm (#)
Why didn’t CR disclose the author or the group of authors who wrote this “biased opinion piece”? After reading Mr. Bell's (NRMLA President) remarks about his involvement with the author(s) with the Monday article by Admin, the author sounds very, very deceitful, manipulative, and even sleazy. I wish the CR author would respond to the charges both Mr. Bell and Mr. Veale make. Maybe we could understand what the CR people are thinking about.
I wonder if a senior who relies on the CR article and suffers loss could sue CR? Now that would be a very interesting lawsuit!!!
August 20th, 2009 at 3:09 pm (#)
We once bought a $1,400 stove that was highly rated by CR (and others). It was a gorgeous, shiny beauty. Trouble was it couldn't properly broil a steak. We had several people look at it. The manufacturer claimed it was ok. Eventually, after much fighting they took it back. No apology. We bought a stove at half the price and got nicely browned steaks. (Sorry vegetarians.)
That's the quality of CRs “reporting/testing”.
I don't know if anyone has successfully sued them for erroneous information.
August 20th, 2009 at 5:23 pm (#)
A thoughtful and articulate review. Thanks.
The fallout is growing, with CR having sent out a script and video to local television stations with their anecdote-rich and fact-thin “investigation.” The local media read the script, which, despite a brief attribution to Consumer Reports, is passed off as their own local “investigation.” That script begins with: the “investigation reveals those loans all too often lead to financial ruin.”
The identical CR script has run at least on the ABC affiliate in Portland, OR (http://www.katu.com/news/problemsolver/53539657...) and on the CBS affiliate in Pittsburgh (http://kdka.com/video/?id=61475@kdka.dayport.com) . And perhaps others.
While we know the flaws in the report, the public does not. As an industry we need a credible and public response to the CR report and the fear it is causing in the senior community. I dearly hope that is on NRMLA’s immediate “to do” list.
August 21st, 2009 at 6:15 am (#)
I had a client call are reference this article with concern. I was able to go over the negative points and share the truth with him. Unfortunatly many prospective clients will not have the courage to call to see if what they are reading is correct. I feel that all reverse mortgage specialists should write a letter to CR and the author expressing their dipleasure with contributing to the misconceptions of a program that has helped many seniors.
August 21st, 2009 at 6:39 am (#)
As there is much misinformation coming from uneducated reporters, who don't care, we have one choice, don't buy the magazine. Perhaps a grass roots effort to effect magazine sales is in order.
August 21st, 2009 at 7:07 am (#)
Jim, while the CR article was a tired refrain of language either borne out of ignorance of a product or one tainted with a specific political agenda, this type of inappropriate “reporting” must be stopped.
The concept of an instant and rapid respose must be cranked up a bit by the industry.I would like to point out that on August 9th, I first posted my comments, after the CR article was brought to my attention. http://www.dennishaber.com/2009/08/the-hecm-rev...
I feel sorry for people who have read CR and decided that they must stay away from reverse mortgages at all costs. The thinking being that ,”if CR criticizes the HECM RM program, then it must not be too good.”
This type of reportimg has its consequences: on a personal level, on a political level and on a law making level.
Jim, your comments will help get the point accross that RM are in fact changing the lives(for the better) of seniors all across the country.
DennisHaber.com
August 21st, 2009 at 8:06 am (#)
Too bad media the outlets are not made aware of Consumer Reports' obviously biased opinion piece, labeled as an “investigative report”. If there was ever a juicy story than discrediting CR for breaking their brand promise of fair and accurate reporting it would be this example. Because of the generally perceived objectivity of CR “investigative reports”, this story should be exposed and media outlets could have a very juicy story with this and make CR “pay” for betraying the readers they are supposed to serve (with fair and unbiased supported information). I suspect this is not the first time CR has broken their brand promise to their consumers and maybe it's time for the media outlets to turn the tables on them and report on it.
August 21st, 2009 at 8:18 am (#)
This CR article just adds to the fear of older Americans that they are going to be ripped off.In the past sixteen years I have personaly closed over 1,000 FHA insured reverse mortgages. They have pulled people out of financial ruin when NOBODY else would help them. And not one client has ever said they were sorry or unhappy they had done the reverse mortgage. This media path of fear peddling is part of their self-destruction. Early on it was the banks and other lenders denying reverse mortgaes even existed-they didn't want to lose their profitable loan business. It didn't work. Our industry-wide self-policing will continue to propel us into wider public acceptance, building success on success, because we're needed.Let's hope the politicians don't mess it up with their good intentions.
August 21st, 2009 at 8:54 am (#)
There are still too many hustlers, crooks and outright liars still involved in the RM business. I had worked in the business more than four years and recently took out a RM on my property. I contacted 6-8 RM providers (mostly brokers) and found most of them to be less that straightforward, knowledgeable and willing to work “out side the box” with a possible borrower. The fees are excessive…..the up fronts costs are a disgrace……many of those costs are controlled by the feds, state and local governments.
The mortgage brokers have long been staffed with former used car salesmen, bartenders, aluminum sideing and replacement window sales people who know little about the field of finance. The entire mortgage industry has to be cleaned up….not just the RM industry.
August 21st, 2009 at 10:29 am (#)
I would expand that to other parts of the financial services industry. Many insurance licensees (with hardly any but “sales” training) and some just calling themselves financial planners, with no required educational accreditation and, yes, some (hopefully not too many) with educational designations.
I am not pro legislation and regulations, but I think there should be a universal data base of complaints against individuals and companies, search able by prospects.
It is unfortunate that this is necessary, since this would be complicated to establish (FINRA, state insurance and securities departments, etc.) it would be subject to abuse, misunderstanding, etc. Short of that, someone could develop a honesty pill which would be distributed firstly to politicians.
August 21st, 2009 at 12:18 pm (#)
You can respond to this outrageous article via Consumer Report's website: http://custhelp.consumerreports.org/cgi-bin/con...
Part of my response, citing the article: “The broker told me my name could be put on the mortgage as soon as I turned 62, but that never happened,” Minor says.” Did he and you assume that the lender was going to initiate a new loan automatically? What were their options to obtain this much money – sell the home? If he sells the home now, he walks away without having to pay the shortage between the home value and the loan payoff. How could you have neglected to mention this essential benefit of a Reverse Mortgage? It’s a Non-Recourse Loan! How dare you cite the only condition under which a senior can lose their home and make it sound as though this is always the case?
How many of us sign loan documents and remember the terms five or ten years later? That may be part of what is going on here. Yes, it is good to say “Buyer Beware,” but seniors will suffer financially as a result, rather than benefit from a viable, FHA-insured government program.
Please print a retraction or follow-up story based on accurate information obtained during the four-hour meeting with Mr. Peter Bell, President of the National Reverse Mortgage Lenders Association.
August 21st, 2009 at 2:23 pm (#)
Linda, thanks for the link, I sent them a little love note.
August 21st, 2009 at 7:16 pm (#)
We saw it in So Cal on a local affiliate as well.
How do these guys do this? It's like putting your finger in the dike of lies and all kinds of lies start spilling out!
August 23rd, 2009 at 9:32 am (#)
It gets even worse my friends.
Click the link below and the newscast on ABC!
http://abclocal.go.com/kabc/video?id=6961769
August 24th, 2009 at 6:29 am (#)
See this:
http://www.nytimes.com/2009/08/23/realestate/23...
August 24th, 2009 at 1:29 pm (#)
See this:rnhttp://www.nytimes.com/2009/08/23/realestate/23mort.html?_r=2&scp=1&sq=monitoring%2520loan%2520officers&st=cse